Problem 8-24:

Given:
The president of Univax, Inc., has just approached the company's bank seeking short-term financing
for the coming year, Year 2. Univax is a distributor of commercial vacuum cleaners. The bank has
stated that the loan request must be accompanied by a detailed cash budget that shows the quarters
in which financing will be needed, as well as the amounts that will be needed and the quarters in
which repayments can be made.
To provide this information for the bank, the president has directed that the following data be gathered
from which a cash budget can be prepared:
a
.

b
.

c.

d
.

Budgeted sales and merchandise purchases for Year 2, as well as actual sales and purchases for
the last quarter of Year 1, are as follows:
Merchandis
e
Year 1:
Sales
Purchases
Fourth quarter
actual
$300,000
$180,000
Year 2:
First quarter, estimated
$400,000
$260,000
Second quarter, estimated
$500,000
$310,000
Third quarter, estimated
$600,000
$370,000
Fourth quarter estimated
$480,000
$240,000
The company typically collects 33% of a quarter's sales before the quarter ends and another 65%
in the following quarter. The remainder is uncollectible. This pattern of collections is now being
experienced in the actual data for the Year 1 fourth quarter.
Some 20% of a quarter's merchandise purchases are paid for within the quarter. The remainder is
paid in the follow
quarter.
Selling & Administrative Expenses for Year 2 are budgeted at $90,000 per quarter plus 12% of sales.

Of the fixed amount, $20,000 each quarter is depreciation.

e
.

The company will pay $10,000 in cash dividends each

quarter.

f.

Land purchases will be made as follows during the year: $80,000 in the second quarter and
$48,500
in the third quarter.

g
.

h
.

i.

The Cash account contained $20,000 at the end of Year 1. The company must maintain a minimum
cash balance of at least $18,000.
The company has an agreement with a local bank that allows the company to borrow in increments
of $10,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest
rate on these loans is 1% per month, and for simplicity, we will assume that interest is not
compounded.
The company would, as far as it is able, replay the loan plus accumulated interest at the end of the year.
At present, the company has no loans outstanding.

Required:
1 Prepare the following, by quarter and in total, for Year
.
2:
a
.
A schedule of expected cash collections on sales.
$300,000

$400,000

$500,000

$600,000

$480,000

4th Q Year
1

1st Q Year
2

2nd Q Year
2

3rd Q Year 2

4th Q Year 2

Collections in month of sales (33%)

$132,000

$165,000

$198,000

$158,400

Collections in month following sales (65%)

$195,000

$260,000

$325,000

$390,000

$327,000

$425,000

$523,000

$548,400

Sales

b
.

A schedule of expected cash disbursements for merchandise purchases.

Total
$653,400
$1,170,00
0
$1,823,40
0

Purchases

$180,000

$260,000

$310,000

$370,000

$240,000

4th Q Year
1

1st Q Year
2

2nd Q Year
2

3rd Q Year 2

4th Q Year 2

$52,000
$144,000

$62,000
$208,000

$74,000
$248,000

$48,000
$296,000

$196,000

$270,000

$322,000

$344,000

Payments for purchases -- month of purchase (20%)

Payments for purchases -- following quarter (80%)

2
.

Compute the expected cash disbursements for selling and administrative expenses, by quarter and in
total, for Year 2.
$300,000 $400,000 $500,000
$600,000
$480,000
Sales
4th Q Year
1
Payments for var. operating expenses (12% of sales)
Fixed operating expenses less non-cash depreciation
Cash disbursements for operating expenses

3
.

Total
$236,000
$896,000
$1,132,00
0

1st Q Year
2

2nd Q Year
2

3rd Q Year 2

4th Q Year 2

$48,000
$70,000
$118,000

$60,000
$70,000
$130,000

$72,000
$70,000
$142,000

$57,600
$70,000
$127,600

1st Q Year
2

2nd Q Year
2

3rd Q Year 2

4th Q Year 2

$20,000

$23,000

$18,000

$18,500

$20,000

327,000

425,000

523,000

548,400

$347,000

$448,000

$541,000

$566,900

1,823,400
$1,843,40
0

$196,000
$118,000

$322,000
$142,000
$48,500
$10,000

$344,000
$127,600

$10,000

$270,000
$130,000
$80,000
$10,000

$324,000

$490,000

$522,500

$481,600

Total
$237,600
$280,000
$517,600

Prepare a cash budget by quarter and in total for Year

2.
Cash Budget:
Cash balance, beginning
Add cash
collections
Total cash
available
Less
disbursements:
Merchandise purchases
Selling & Administrative
Land
Dividends (Declared & Paid)
Total disbursements

$10,000

Y2

$1,132,00
0
$517,600
$128,500
$40,000
$1,818,10
0

Net Cash Inflow before Financing

Available for repayment

Financing:
Borrowings
Repayments
$10,000
Interest
1%
Total Financing
Cash balance, ending
Desired minimum cash balance
Excess Over Desired Minimum

$23,000
$5,000

($42,000)
$0

$18,500
$500

$85,300
$67,300

$25,300
$7,300

$0
0
0
$0
$23,000

$60,000
0
0
$60,000
$18,000

$0
0
0
$0
$18,500

$0
($60,000)
(5,400)
($65,400)
$19,900

$60,000
($60,000)
($5,400)
($5,400)
$19,900

$18,000
$5,000

$18,000
$0

$18,000
$500

$18,000
$1,900

$18,000
$1,900