Solved: During the last week of August Apache Arts

Company s owner
During the last week of August Apache Arts Company s owner

During the last week of August, Apache Arts Company’s owner approaches the bank for an
$80,000 loan to be made on September 2 and repaid on November 30 with annual interest of
12%, for an interest cost of $2,400. The owner plans to increase the store’s inventory by
$60,000 during September and needs the loan to pay for inventory acquisitions. The bank’s
loan officer needs more information about Apache Arts’ ability to repay the loan and asks the
owner to forecast the store’s November 30 cash position. On September 1, Apache Arts is
expected to have a $3,000 cash balance, $135,000 of accounts receivable, and $100,000 of
accounts payable. Its budgeted sales, merchandise purchases, and various cash
disbursements for the next three months follow.

The budgeted September merchandise purchases include the inventory increase. All sales are
on account. The company predicts that 25% of credit sales is collected in the month of the sale,
45% in the month following the sale, 20% in the second month, 9% in the third, and the
remainder is uncollectible. Applying these percents to the August credit sales, for example,
shows that $81,000 of the $180,000 will be collected in September, $36,000 in October, and
$16,200 in November. All merchandise is purchased on credit; 80% of the balance is paid in the
month following a purchase, and the remaining 20% is paid in the second month. For example,
of the $100,000 August purchases, $80,000 will be paid in September and $20,000 in October.
Required
Prepare a cash budget for September, October, and November for Apache Arts Company.
Show supporting calculations asneeded.

During the last week of August Apache Arts Company s owner

ANSWER
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