Jake Marley, owner of Marley Wholesale, is negotiating with the bank for a $200,000, 90-day, 12 percent loan effective July 1 of the current year. If the bank grants the loan, the proceeds will be $194,000, which Marley intends to use on July 1 as follows: pay accounts payable, $150,000; purchase equipment, $16,000; add to bank balance, $28,000.

The current working capital position of Marley Wholesale, according to financial statements as of June 30, is as follows:

Cash in bank . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... $ 20,000

Receivables (net of allowance for doubtful accounts) . . . . . .. 160,000

Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....$270,000

Accounts payable (including accrued operating expenses) . . . . 150,000

Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..$120,000

The bank loan officer asks Marley to prepare a forecast of his cash receipts and cash payments for the next three months to demonstrate that the loan can be repaid at the end of September.

Marley has made the following estimates, which are to be used in preparing a three-month cash budget: Sales (all on account) for July, $300,000; August, $360,000; September, $270,000; and October, $200,000. Past experience indicates that 80 percent of the receivables generated in any month will be collected in the month following the sale, 19 percent will be collected in the second month following the sale, and 1 percent will prove uncollectible. Marley expects to collect $120,000 of the June 30 receivables in July and the remaining $40,000 in August.

Cost of goods sold consistently has averaged about 65 percent of sales. Operating expenses are budgeted at $36,000 per month plus 8 percent of sales. With the exception of $4,400 per month depreciation expense, all operating expenses and purchases are on account and are paid in the month following their incurrence.

Merchandise inventory at the end of each month should be sufficient to cover the following month’s sales.

Instructions

a. Prepare a monthly cash budget showing estimated cash receipts and cash payments for July, August, and September, and the cash balance at the end of each month. Supporting schedules should be prepared for estimated collections on receivables, estimated merchandise purchases, and estimated payments for operating expenses and of accounts payable for merchandise purchases.

b. On the basis of this cash forecast, write a brief report to Marley explaining whether he will be able to repay the $200,000 bank loan at the end of September.