Question

Question: During the last week of March, Sony Stereo’s owner approaches the bank for an \(80,000 loan to be made on April 1 and repaid on June 30 with annual interest of 12%, for an interest cost of \)2,400. The owner plans to increase the store’s inventory by \(60,000 in April and needs the loan to pay for inventory acquisitions. The bank’s loan officer needs more information about Sony Stereo’s ability to repay the loan and asks the owner to forecast the store’s June 30 cash position. On April 1, Sony Stereo is expected to have a \)3,000 cash balance, \(135,000 of accounts receivable, and \)100,000 of accounts payable. Its budgeted sales, merchandise purchases, and various cash payments for the next three months follow.

	A	B	C	D
1	Budgeted figure	April	May	June
2	Sales	\(220,000	\)300,000	\(380,000
3	Merchandise purchases	210,000	180,000	220,000
4	Cash payments
5	Payroll	16,000	17,000	18,000
6	Rent	6,000	6,000	6,000
7	Other cash expense	64,000	8,000	7,000
8	Repayment of bank loan			80,000
9	Interest on bank loan			2,400

*Operations began in March; March sales were \)180,000 and purchases were \(100,000.

The budgeted April merchandise purchases include the inventory increase. All sales are on account. The company predicts that 25% of credit sales is collected in the month of the sale, 45% in the month following the sale, 20% in the second month, 9% in the third, and the remainder is uncollectible. Applying these percents to the March credit sales, for example, shows that \)81,000 of the \(180,000 will be collected in April, \)36,000 in May, and \(16,200 in June. All merchandise is purchased on credit; 80% of the balance is paid in the month following a purchase and the remaining 20% is paid in the second month. For example, of the \)100,000 March purchases, \(80,000 will be paid in April and \)20,000 in May.

Required

Prepare a cash budget for April, May, and June. Show supporting calculations as needed.

Short answer

Answer

The cash budget for April, May, and June are $53,000, $44,000, and $34,800.

Step-by-step solution

Meaning of Cash Budget

A cash budget is a statement that summarizes the company's projected cash revenues and expenditure for a particular period.

Preparing cash budget for April, May, and June

Sony Stereo’s Company
Cash Budget
Particulars	April ($)	May ($)	June ($)
Beginning cash balance	3,000	53,000	44,000
Add: cash receipts from customer	136,000	210,000	290,200
Total cash available (A)	139,000	263,000	334,200
Less: Cash disbursement
Payments on accounts payable	80,000	188,000	186,000
Payroll	16,000	17,000	18,000
Rent	6,000	6,000	6,000
Other expenses	64,000	8,000	7,000
Total cash disbursement (B)	166,000	219,000	217,000
Preliminary cash balance (A-B)	(27,000)	44,000	117,200
Loan Activity
Loan from bank	80,000	0	0
Interest payments			2,400
Repayment of loan	0	0	80,000
Ending cash balance	$53,000	$44,000	$34,800

Working notes:

Calculation of collection on credit sales:

Collection from accounts receivables	April ($)	May ($)	June ($)
Budgeted sales	220,000	300,000	380,000
Collection from account receivables
March month collection	81,000	36,000	16,200
April month collection	55,000	99,000	44,000
May month collection	0	75,000	135,000
June month collection	0	0	95,000
Total	136,000	210,000	290,200

Calculation of payment on the credit purchase:

Payment on credit purchase	April ($)	May ($)	June ($)
Budgeted purchase	210,000	180,000	220,000
Payments for March month	80,000	20,000
Payments for April month		168,000	42,000
Payments for May month			144,000
Total	80,000	188,000	186,000