# Cash budget | Accounting homework help

The president of the retailer Prime Products has just approached the company’s bank with a request for a \$30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring invento­ries. Because the company has had some difficulty in paying off its loans in the past, the loan of­ficer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used:

a.     On April I, the start of the loan period, the cash balance will be \$24,000. Accounts receivable on April 1 will total \$140,000, of which \$120,000 will be collected during April and \$16,000 will be collected during May. The remainder will be uncollectible.

b.     Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:

April                May                 June

Sales (all on account)                                      \$300,000         \$400,000         \$400,000

Merchandise purchases                                   \$210,000         \$160,000         \$130,000

Payroll                                                             \$20,000           \$20,000           \$18,000

Lease payments                                               \$22,000           \$22,000           \$22,000

Equipment purchases                                                                                      \$65,000

Depreciation                                                    \$15,000           \$15,000           \$15,000

c.     Merchandise purchases are paid in full during the month following purchase. Accounts pay­able for merchandise purchases during March, which will be paid during April, total \$140,000.

d.     In preparing the cash budget, assume that the \$30,000 loan will be made in April and repaid in June. Interest on the loan will total \$1,200.

Required:

1.     Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total.

2.     Prepare a cash budget, by month and in total, for the three-month period.

3.     If the company needs a minimum cash balance of \$20,000 to start each month, can the loan be repaid as planned? Explain.

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