Herbal Care

Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $60,000, 30-day loan from its bank to help meet cash requirements. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the 2019 quarter. In response to this request, the following data has been assembled.

  • On July 1, the beginning of the third quarter, the company will have a cash balance of $55,000.
  • Actual sales for the last two months and budgeted sales for the third quarter follow:

May (actual)……………………$250,000 June (actual)……………………$300,000 July (budgeted)…………………$400,000 August (budgeted)………………$600,000 September (budgeted)…………. $320,000

Past experiences show that 25% of a month’s sales are collected in the month of the sale, 70% in the month following the sale, and 1% in the second month following the sale. The remainder is uncollectible.

  • Budgeted merchandise purchases and budgeted expenses for the third quarter are given below:

July

Merchandise purchases……. $240,000 Salaries and wages…………….45,000 Advertising……………………130,000 Rent payments…………………. 9,000 Depreciation……………………10,000

August

$350,000 50,000 145,000 9,000

10,000

September

$175,000 40,000 80,000 9,000 10,000

Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $180,000.

  • Equipment costing $10,000 will be purchased for cash during August.
  • In preparing the cash budget, assume that the $60,000 loan will be made on August 31, 2019 and repaid on September 30, 2019. Interest on the loan will be calculated at 10% per annum.

Required:

  1. a) Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. (10 marks)
  2. b) Prepare a cash budget, by month and in total, for the third quarter. (15 marks)
  3. c) In your own words, define master budget and explain its major benefits (at least two) in an organization. (5 marks)