It is mid-February and a company has just approached its bank with a request for a $300,000 90-day loan to meet its working capital requirements. Inventories peak in April in anticipation of spring sales, and the treasurer believes the company can repay the loan in full by the end of the 90-day loan period. In support of the loan application, the bank has requested a three-month for March, April, and May. If the loan is granted, it will be made in March and repaid in May and have an interest cost of $24,000 payable at the time of repayment. The following data are available to assist in the preparation of the cash budget:
a. The loan will be granted on March 1. The cash balance at the beginning of March is $520,000. Of the on February 28, the company expects to collect $2,660,000 in March and $144,000 in April. These expected collections are estimated after allowing that some of the receivables will be uncollectible.
b. Past collection experience indicates that 20% of a month’s sales will be collected in the month of the sale, 75% the next month, and 4% the second month after the sale, and that 1% will never be collected and represents bad debts.
c. Merchandise purchases are paid in full on the 15th of each month for any purchases made between the 15th of the previous month and the 14th of the current month. The company has estimated the following amounts will be purchased during the budget period:
d. Equipment will be sold in March. The terms of the sale are such that a loss on sale of $60,000 will be reported on the income statement for March. The carrying amount of the asset to be disposed of is $220,000.
e. The following are budgeted sales and expenses for the three-month loan period:
Required:
1. Prepare a schedule of expected cash collections for the months of March, April, and May, and for the three months in total.
2. Prepare a by month and in total, for the three-month period.
3. Explain whether the loan can be repaid as planned if the company needs a minimum starting cash balance of $400,000 each month.
4. What is the impact on the cash flow of the policy regarding paying for purchases? Will it make a difference to pay for purchases over two months? Do not redo the and provide a brief qualitative answer.
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