Preparing a Monthly Cash Budget

Cash in bank: $20,000
Receivables(net of allowance for doubtful accounts): $160,000
Merchandise inventory: $90,000
Total current assets: $270,000
Accounts payable(including accured operating expenses): $150,000
Working capital: $120,000

(the above breakdown is of the financial statement of june 30 and shows the current working capital)

Jake Marley is negotiating with the bank for a $200,000, 90-day 12% loan effective July 1 of the current year. If the bank grants the loan, the proceeds will be $194,000, which Marley intends to use on July 1 as follows: pay accounts payable, $150,000, purchase equipment $16,000 and add to bank balance $28,000

The bank loan officer asks Marley to prepare a forecase of his cash receipts and cash payments for the next 3 months to demonstrate that the loan can be repaid at the end of September.

Marley has made the following estimates which are to be used in preparing a 3 month cash budget: Sales (all on account) for July $300,000, Aug $360,000, Sept $270,000 and Oct $200,000. Past experience indicates that 80% of the receivables generated in any month will be collected in the month following the sale, 19% will be collected in the second month following the sale and 1% will prove uncollectible. Marley expects to collect $120,000 of the June 30 receivables in July and the remaining $40,000 in August.

Cost of goods sold consistently has 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 on account and are paid in the month following their incurrence.

Merchandise inventory at the end of each month should be sufficient to cover the following months sales.

INSTRUCTIONS:
A. Prepare a monthly cash budge showing estimated cash receipts and cash payment for July, August and September and the cash balance at the end of each month. Supporting schedules should be prepared for estimated collections on receivables, estimated merchandise purchases and estimated payments for operating expenses and accounts payable for merchandise purchases.

B. On the basis of this cash forecast, write a brief report to Marley explaining whether he will be able to repay the $200,000 bank loan at the end of September.

Thank you!