Expert Solutions

Mark Sackett has approached the company’s bank seeking short-term financing for 2014. Mark is the owner of an upstart company that sells health supplement and weight loss products. The bank has stated that the loan request must be accompanied by a detailed cash budget that shows the amount that will be needed for the first two quarters of 2014. Mark has assembled the following information.
a) 2013
Sales Merchandise
Purchases
Fourth quarter actual $300,000 $180,000
2014
First quarter estimated $400,000 $260,000
Second quarter estimated $500,000 $310,000
b) Mark estimates the company will collect 33% of a quarter’s sales before the quarter ends and another 65% in the following quarter. The remainder is uncollectible.
c) Some 20% of a quarter’s merchandise purchases will be paid within the quarter. The remainder will be paid in the following quarter.
d) Selling and administrative expenses for 2014 are budgeted at $90,000 per quarter plus 12% of sales. Of the fixed amount, $20,000 each quarter represents depreciation expense.
e) The company plans to pay $10,000 in cash dividends each quarter.
f) Land for future expansion will be purchased for $80,000 in the second quarter.
g) The Cash balance is $20,000 at the end of 2013. The company must maintain a minimum cash balance of at least $18,000.
h) The company has an agreement with the 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 simple interest (no compounding). The company will repay any loan plus accumulated interest at the end of the year.
i) The company has no loans outstanding at present.