Problem 9-48        Understanding Relationships, Cash Budget, Pro Forma Balance Sheet Ryan Richards, controller for Grange  Retailers,  has  assembled  the  following  data  to  assist  in the  preparation  of a cash budget  for the  third  quarter  of 2014:

a.       Sales:

 

 

May (actual)                                                                     $100,000

June (actual)                                                                       120,000

July (estimated)                                                                    90,000

August (estimated)                                                             100,000

September (estimated)                                                        135,000

October (estimated)                                                            110,000

 

b.       Each month, 30% of sales are for cash and 70% are on credit. The collection pattern for credit sales is 20% in the month of sale, 50% in the following month, and 30% in the second month following the sale.

c.        Each month, the ending inventory exactly equals 50% of the cost of next month’s sales. The markup on goods is 25% of cost.

d.       Inventory purchases are paid for in the month following the purchase.

e.        Recurring monthly expenses are as follows:

 

Salaries and wages	$10,000
Depreciation on plant and equipment	4,000
Utilities	1,000
Other	1,700

f.        Property taxes of $15,000 are due and payable on July 15, 2014.

g.        Advertising fees of $6,000 must be paid on August 20, 2014.

h.       A lease on a new storage facility is scheduled to begin on September 2, 2014. Monthly pay- ments are $5,000.

i.         The company has a policy to maintain a minimum cash balance of $10,000. If necessary, it will borrow to meet its short-term needs. All borrowing is done at the beginning of the month. All payments on principal and interest are made at the end of a month. The annual interest rate is 9%. The company must borrow in multiples of $1,000.

j.         A partially completed balance sheet as of June 30, 2014, follows. (Note: Accounts payable is for inventory purchases only.)

 

Cash	$            ?	Â
Accounts receivable	?
Inventory	?
Plant and equipment, net	425,000
Accounts payable	Â	Â	$            ?
Common stock	Â	Â	210,000
Retained earnings	Â	Â	268,750
Total	$           ?	Â	$            ?

 

 

Required:

1.       Complete the balance sheet given in Item j.

2.       Prepare a cash budget for each month in the third quarter and for the quarter in total (the third quarter begins on July 1). Prepare a supporting schedule of cash collections.

3.       Prepare a pro forma balance sheet as of September 30, 2014.

4.       CONCEPTUAL CONNECTION Form a group with two or three other students. Discuss why a bank might require a cash budget for businesses that are seeking short-term loans. Determine what other financial reports might be useful for a loan decision. Also, discuss how the reliability of cash budgets and other financial information can be determined.