Jim Henry, owner of Henrys Retail, is negotiating a $100,000, 15%, four-month loan from the Garfield County

Question:

Jim Henry, owner of Henry’s Retail, is negotiating a $100,000, 15%, four-month loan from the Garfield County Bank, effective October 1, 2010. The bank loan officer has requested that Henry’s prepare a cash budget for each of the next four months as evidence of its ability to repay the loan.

The following information is available as of September 30, 2010:

Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,500

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,000

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,500

a. The accounts payable are for September merchandise purchases and operating expenses and will all be paid in October. Sales forecasts for the next few months are October, $220,000; November, $300,000; December, $400,000; January, $200,000; February, $140,000.

b. Collections on sales are usually made at the rate of 20% during the month of the sale, 60% during the month following the sale, and 15% during the second month after the sale. Five percent of accounts receivable are written off as uncollectible. Of the $97,500 of accounts receivable at September 30, $65,000 will be collected in October, and $32,500 will be collected in November. Cost of goods sold is 55% of sales, with all purchases paid for in the month following purchase. Ending inventory should always equal the cost of the goods that will be sold during the next month. Operating expenses are $18,000 a month plus 5% of sales, all paid in the month following their incurrence.

Required:

Prepare a cash budget showing receipts and disbursements for October, November, December, and January. Also, prepare supporting schedules for cash collections, purchases, and operating expenses.

Assume that the loan plus interest will be paid on January 31.

Ending Inventory
The ending inventory is the amount of inventory that a business is required to present on its balance sheet. It can be calculated using the ending inventory formula Ending Inventory Formula =... Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive... Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that... Cash Budget
A cash budget is an estimation of the cash flows for a business over a specific period of time. These cash inflows and outflows include revenues collected, expenses paid, and loans receipts and payment. Its primary purpose is to provide the...