Herbal Care Corp. a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank to help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled:

a. On July 1, the beginning of the third quarter, the company will have a cash balance of $44,500.
b.

Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):


May (actual) $250,000
June (actual) $300,000
July (budgeted) $400,000
August (budgeted) $600,000
September (budgeted) $320,000


Past experience shows that 25% of a month's sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible.

c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below:

July August September
Merchandise purchases $240,000 $350,000 $175,000
Salaries and wages $45,000 $50,000 $40,000
Advertising $130,000 $145,000 $80,000
Rent payments $9,000 $9,000 $9,000
Depreciation $10,000 $10,000 $10,000


Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $180,000.

d. Equipment costing $10,000 will be purchased for cash during July.
e.

In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September. Interest on the loan will total $1,200.

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I've gotten that far... I have the same homework, but still have few more questions...

Scgedule of cash collections
May... June... July... August... September... October
Sales/Revenue
$250,000.00... $300,000.00... $400,000.00... $600,000.00... $320,000.00
Beginning cash
... $44,500.00...
25% cur.month
$62,500.00... $75,000.00... $100,000.00... $150,000.00... $80,000.00
70% 1st month
$175,000.00... $210,000.00... $280,000.00... $420,000.00... $224,000.00
3% 2nd month
$7,500.00... $9,000.00... $12,000.00... $18,000.00
Other income... $40,000.00
Total collection per month... $357,500.00... $439,000.00... $512,000.00
Total cash inflow for 3rd Quarter... $1,353,000.00


Schedule of cash payments
... July... August... Sept... Oct
Merchandise purchases... $180,000.00... $240,000.00... $350,000.00... $175,000.00
Salaries and
Wages... $45,000.00... $50,000.00... $40,000.00
Advertising ... $130,000.00... $145,000.00... $80,000.00
Rent payments... $9,000.00... $9,000.00... $9,000.00
Depreciation... $10,000.00... $10,000.00... $10,000.00
Equipment... $10,000.00
Loan interest... $1,200.00




Do I count depreciation every month as a cash payment? Where do I calculate the repayment of the loan?
If the company needs a MIN cash balance of $20,000.00 to start each month, can the loan be repaid as planned? Please explain!

I'd appreciate everyone's help. I tried to get the answers... if wrong so far, please, correct me :)

Depreciation does not affect your cash flows, as it is a non cash operating expense. The problem states that the loan will be repaid in September.

So, then it would look like this?
Schedule of cash collections
Other income - for July 40,000.00

Schedule of cash payments
... July... August... Sept... Oct
Merchandise purchases... $180,000.00... $240,000.00... $350,000 .00... $175,000.00
Salaries and
Wages... $45,000.00... $50,000.00.. . $40,000.00
Advertising... $130,000.00... $145,000.00... $80,000.0 0
Rent payments... $9,000.00... $9,000.00... $9, 000.00
Equipment... $10,000.00
Loan principal + interest (in september)... $1,200.00



Once the loan is coming in July as income, and once repaid in Sept + interest in payments?

Why depreciation does not go in cash operations if given in the description of task in operations? Sorry, this is only one chapter of the book we study accounting and I'm not really familiar with operations at all!

Thanks!

Is this the cash budget and right answers?

Cash budget of cash operations
July August September
Beginning cash $44,500.00 $28,000.00 $23,000.00
Cash Collections $357,500.00 $439,000.00 $512,000.00
Available cash $402,000.00 $467,000.00 $535,000.00
Cash Payments $374,000.00 $444,000.00 $520,200.00
Ending cash $28,000.00 $23,000.00 $14,800.00
Minimum cash $20,000.00 $20,000.00 $20,000.00
Borrow $ -
Invest $8,000.00 $3,000.00 $(5,200.00)

If we have $20,000.00 min cash every month the loan would NOT be able to be repaid as planned as we'll have only $14,800.00 cash ending in Sept?? Or will it be able to be repaid??

Thanks!