During the last week of August, Apache Arts Company’s owner approaches the bank for an $100,000 loan to be made on September 2 and repaid on November 30 with annual interest of 17%, for an interest cost of $4,250. 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 $4,500 cash balance, $108,000 of accounts receivable, and $100,000 of accounts payable. Its budgeted sales, merchandise purchases, and various cash disbursements for the next three months follow.
Budgeted Figures* September October November
Sales $ 230,000 $ 455,000 $ 440,000
Merchandise purchases 230,000 225,000 202,000
Payroll 20,100 22,050 24,900
Rent 12,000 12,000 12,000
Other cash expenses 33,800 28,800 20,900
Repayment of bank loan 100,000
Interest on the bank loan 4,250
*Operations began in August; August sales were $150,000 and purchases were $105,000.
The budgeted September merchandise purchases include the inventory increase. All sales are on account. The company predicts that 28% of credit sales is collected in the month of the sale, 43% in the month following the sale, 23% in the second month, 5% in the third, and the remainder is uncollectible. Applying these percents to the August credit sales, for example, shows that $64,500 of the $150,000 will be collected in September, $34,500 in October, and $7,500 in November. All merchandise is purchased on credit; 90% of the balance is paid in the month following a purchase, and the remaining 10% is paid in the second month. For example, of the $105,000 August purchases, $94,500 will be paid in September and $10,500 in October.