Friendly Freddie’s is an independently owned major appliance and electronics discount chain with seven stores in a Midwest metropolitan area. Rapid expansion has created the need for careful planning of cash requirements to ensure that the chain is able to replenish stock adequately and meet payment schedules to creditors. Fred Ferguson, founder of the chain, has established a banking relationship that provides a $200,000 line of credit to Friendly Freddie’s. The bank requires that a minimum balance of $8,200 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,200, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,200 at month-end. Friendly Freddie’s attempts to borrow as little as possible and repays the loans quickly in multiples of $1,000 plus 2 percent monthly interest on the entire loan balance. Interest payments and any principal payments are paid at the end of the month following the loan. The chain currently has no outstanding loans. The following cash receipts and disbursements data apply to the fourth quarter of the current calendar year:

Estimated beginning cash balance ....... $ 8,800

Estimated cash sales:

October ..................$ 14,000

November ................. 29,000

December .................. 44,000

Sales on account:

July (actual) ...............$130,000

August (actual) .............. 104,000

September (actual) .............. 128,000

October (estimated) ............ 135,000

November (estimated) ........... 142,000

December (estimated) ............ 188,000

Projected cash collection of sales on account is estimated to be 70 percent in the month following the sale, 20 percent in the second month following the sale, and 6 percent in the third month following the sale. The 4 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,000 cash on a note receivable in October.

All inventory purchases are made on account as the chain has excellent credit with all vendors because of a strong payment history. The following information regarding inventory purchases is available:

Inventory Purchases

September (actual) .......$120,000

October (estimated) ...... 112,000

November (estimated) ..... 128,000

December (estimated) ......95,000

Cash disbursements for inventory are made in the month following purchase using an average cash discount of 3 percent for timely payment. Monthly cash disbursements for operating expenses during October, November, and December are estimated to be $38,000, $41,000, and $46,000, respectively.

Required:

Prepare Friendly Freddie’s cash budget for the months of October, November, and December showing all receipts, disbursements, and credit line activity, where applicable.

(CMA adapted)