Red Gabby, owner of RG Wholesalers, is negotiating with the Caribbean Dominion Bank for a $200,000, 12%, 90-day loan effective July 1 of the current year. If the bank grants the loan, the proceeds will be $194,000, which Red Gabby intends to use on July 1 as follows: pay accounts payable, $150,000; purchase equipment, $16,000; add to cash balance; $28,000.
The current working capital position of RG Wholesalers, according to financial statements as of June 30, is as follows:
Cash in bank - $20,000
Accounts receivable (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 Red Gabby 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.
Red Gabby has made the following estimates, which are to be use in preparing a three-month cash budget: Sales (all on open account) for July, $300,000; August, $360,000; September, $270,000; and October, $200,000. Past experience indicates that 80% of the receivables generated in any month will be collected in the month following the sale, 19% in the second month following the sale, and 1% will prove uncollectible. Red Gabby expects to collect $120,000 of the June 30 receivables in July and the remaining $40,000 in August.
Cost of goods sold has consistently averaged about 65% of sales. Operating expenses are budgeted at $36,000 per month plus 8% of sales. With the exception of $4,400 per month depreciation expense, all operating expenses and purchases 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.
Prepare the following schedules for each of the three months:
Cash collections on accounts receivable [3 marks]
Estimated merchandise purchases [5 marks]
Estimated cash payments for accounts payable (merchandise purchases) and operating expenses [4 marks]
