Ann Hoffman, owner of Hoffman Industries, is negotiating with the bank for a $250,000, 90-day, 15 percent loan effective July 1 of the current year. If the bank grants the loan, the net proceeds will be $240,000, which Hoffman intends to use on July 1 as follows: pay accounts payable, $200,000; purchase equipment, $25,000; and add to bank balance, $15,000.

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

Cash in bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,000

Receivables (net of allowance for doubtful accounts). . .. 200,000

Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 80,000

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . ....$298,000

Accounts payable (including accrued operating expenses) . . . 160,000

Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...$138,000

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

Hoffman has made the following estimates, which are to be used in preparing a three-month cash budget: Sales (all on account) for July, $340,000; August, $360,000; September, $300,000; and October, $220,000. Past experience indicates that 75 percent of the receivables generated in any month will be collected in the month following the sale, 24 percent will be collected in the second month following the sale, and 1 percent will prove uncollectible. Hoffman expects to collect $160,000 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 $40,000 per month plus 10 percent of sales. With the exception of $5,000 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. Ann Hoffman has contacted you to prepare a cash budget showing estimated cash receipts and cash payments for July, August, and September. First, you must prepare the following schedules:

1. Estimated cash collections on receivables.

2. Estimated merchandise purchases.

3. Estimated cash payments for operating expenses.

4. Estimated cash payments on accounts payable (including operating expenses).

b. Once the schedules have been prepared, complete the cash budgets for July, August, and September showing the cash balance at the end of each month.