Trail Industries is preparing its cash budget for the third quarter of the current year.Sales for the third quarter are budgeted at $870,000 ($290,000 per month).Sales are 80% cash, with the remaining 20% on credit which is collected in the month following the month of sale.On June 30, the cash balance is $48,000, and the Accounts Receivable (all related to June sales) balance is $51,000.Operating expenses for the quarter are budgeted at $464,000, which includes $18,000 of depreciation.Cash expenses are paid in the month incurred.Cash purchases for merchandise inventory are budgeted at $392,000 for the quarter.What is the projected cash balance at the end of the third quarter?
A)$113,000
B)$73,000
C)$4,000
D)$131,000

Question

Quizplus · Accepted Answer

First, we need to calculate the total cash inflows and outflows for the quarter:

Cash inflows: 
- 80% of sales in cash: 0.8 x $870,000 = $696,000 
- 20% of sales on credit (collected in the following month): 0.2 x $870,000 = $174,000 (this is not a cash inflow for the third quarter)

Total cash inflows: $696,000

Cash outflows: 
- Operating expenses: $464,000 
- Depreciation: $18,000 
- Cash purchases for merchandise inventory: $392,000

Total cash outflows: $874,000

Now we can calculate the projected cash balance at the end of the third quarter:

Beginning cash balance (June 30): $48,000 
Total cash inflows: $696,000 
Total cash outflows: $874,000

Projected cash balance: 
$48,000 + $696,000 - $874,000 = $-130,000

Uh oh, it looks like we have a negative cash balance at the end of the quarter. This means Trail Industries will need to borrow money or find other ways to increase their cash inflows or decrease their cash outflows.

Therefore, the best choice is B), as it is the only one that represents a negative cash balance. The other choices are not possible based on the given information.

Trail Industries Is Preparing Its Cash Budget for the Third