Question:
Yamba Home Products is just beginning its fourth quarter, in which peak sales occur. The company has requested a $12,000, 90-day loan from its bank to help meet cash requirements during the quarter. The loan officer has asked for a cash budget for the quarter to help determine whether the loan should be made.
The following data are available for the quarter:
1. On April 1, the start of the quarter, the company had a cash balance of $6,000. Accounts receivable on April 1 totalled $31,500, of which $29,500 will be collected during April and $1,600 will be collected during May. The remainder will be uncollectable.
2. Past experience shows that 25 percent of a month''s sales are collected in the month of sale, 70 percent in the month following sale, and 4 percent in the second month following sale. Budgeted sales and expenses for the fourth quarter follow:
April
May
June
Sales
$ 50,000
$60,000
$45,000
Merchandise purchase
36,000
27,000
24,000
Payroll
6,500
6,750
6,000
Rent payment
4,500
4,500
4,500
Other Cash payments
8,500
9,100
7,500
Depreciation
2,500
2,500
2,500
3. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on March 31, which will be paid during April, totalled $30,000.
4. In preparing a cash budget, assume that the loan is made in April and repaid in June. Interest on the loan will total $450.
Required:
a. Prepare a schedule of budgeted cash collections for April, May and June and for the quarter in total.
b. Prepare a cash budget, by month and in total, for the quarter.
c. If the company needs a minimum cash balance of $5,000 to start each month, can the loan be repaid as planned? Explain.