Accounting 2 – ACCT 122 – Program #237 – Budgeting – Continued

>>Hey, guess where we are? We're at class again. Where am I? Are you guys ready for this semester to be
over? >>Yes. >>The analogy I gave to one of my other classes
is, when you were a kid, did you ever have like a friend over to spend the night, and
they came over Friday night and you had all sorts of fun, and you stayed up late, and
then they spent the night. And then Saturday morning you had all sorts
of fun with this kid, and then they stayed for lunch, and then it went into the afternoon. And towards about the middle of the afternoon,
you were kind of ready for this kid to go home. Did you ever have that? I feel like in that analogy, I'm the kid that
you're kind of ready for to go on home. Is that true? So, kind of getting a little tired of me. Jokes aren't as funny. But we only have, I think, about four or five
more of these lectures and then we are done. So, let's go ahead and dive right in.

I didn't give you that much homework, did
I? Okay. And today we're going to work on some stuff
in class so you won't have to listen to me yack too much. So let's go ahead and, I believe that we had
started Exercise 221; is that correct? And we had done January oops, let me switch
that over to the document cam, okay. This is the one we're doing right here, okay. Now, this is a situation where well, let's
just take a look at it. Kayak Co budgeted the following cash receipts,
excluding cash from loans received and cash disbursements excluding cash disbursements
for loans and interest payments for the first three months in the next year. According to a credit agreement with a company
bank, Kayak promises to have a minimum cash balance of $30,000 at each month end, okay? In return, the bank has agreed that the company
can borrow up to 150,000 at an annual interest rate of 12%, paid in the last day of each
month. We've talked about how an annual interest
rate of 12% is a monthly interest rate of? 1%. The interest is computed based on the beginning
balance of the loan for the month.

The company has a cash balance of 30,000 and
a loan balance of 60,000 at January 1, okay? And we talked about why the bank has invested
interest in making sure that we have enough cash in our checking account so that we can
conduct operations for our business, right? Okay. And I think where last we had left this situation
we had completed January; is that correct? We had completed January, all right? So let's go ahead and continue on. And these problems you have to do chronologically,
right? You have to work your way completely through
January before you do anything in February, okay? So let's what is the beginning cash balance
let me go ahead you can see that title. Make sure you title that thing up but I don't
want it taking up screen space. Okay. All right. What is the beginning balance of cash for
February? Well, it's the ending balance of cash for

Now, don't make a mistake and put the loan
balance, that's not the ending cash balance for January, okay? The ending cash balance for January is 30,000,
okay? So this is 30,000, okay? What are the cash receipts for February? Okay. So this is the sum of that, right? Okay. What are the cash disbursements? >>350,000? >>350,000, right. Now, do we have some interest expense? Oops, I think I already typed this in. Maybe not. Okay. February, and that is computed how? We take 10,600; is that correct? Times 1%; is that right? >>Yeah. >>And that was 106; is that correct? >>106
>>It's 106 exactly, isn't it? >>Yeah. >>Okay. All right, so now we have our preliminary
cash balance which will be this number, minus this number, minus this number. And we have 79,894; is that correct? All right. So we have I have this highlighted because
this is where we have that discussion with ourselves. Do we have at least $30,000 in our account? >>Yeah.

>>Yes, okay, that's good. We don't have to borrow anything. Can we afford to pay back some loan? Yes. Now how much loan can we pay back? Well, we can actually pay back the whole thing,
can't we? At least what we owe at this point, right? So, let's do that. Okay. We can pay back that 10,600 because that is
what we owe. And what is our new ending cash balance. Is that the correct? 69,294. And what's our ending loan balance? >>Zero. >>Zero. Okay, good. All right, any questions on February? What's the beginning balance of March? >>69,294. >>What are the cash receipts? 450,000, right? So the total cash available is 519,294.

The cash disbursements are 525,000, okay. What's our interest expense? >>Zero. >>We don't have any because there's no loan
balance, right? You pay your interest based on the loan balance
at the beginning of the month so we don't have any interest expense. So what is our preliminary cash balance? Negative 5,706, right? Well, we're supposed to have at least 30,000
in there, right? And we have negative 5,706, okay? So how much do we have to borrow how much
do we have to borrow to bring us up to a positive 30,000? >>35,706.
>>35,706; is that correct? Okay. So this is like a line of credit that we have
with the bank. It's there if we need to draw on it. >>In the repayment part there. >>Oh, thank you. Thank you, Henry. Okay, yeah, I put it on the wrong line. This is not the repayment of a loan, this
is a what do we call this additional loan from bank. Okay? So the additional loan from the bank is 35,706;
is that right? Okay. So now we have our ending cash balance of?
30,000; is that correct? Make sense? And what is our ending loan balance as of
the end of March? So there we go, correct? This is a good problem to work through.

A good problem to work through in regards
to budgeting. We'll do another one in here in class in a
little bit, okay? And, of course, make sure you title that thing
up so that if you give it to somebody they know what they're actually looking at. Okay? All right. Okay. Any questions? Yes, sir. Luke. >>Do companies always, just like, take out
loans like that frequently on a monthly basis regarding their budget? >>That's a good question. What we have here is the question he asked
is do companies always act in this manner? Do they always just, you know, because maybe
it seems odd that you're taking out loans one month or paying loans the next.

This is kind of a line of credit situation. This isn't so much taking out a loan like
you might be used to for a student loan or for an automobile purchase or a land purchase. This is a line of credit that you can draw
on to give you cash for your to provide cash for your operations. So yeah, this is pretty typical. You have a line of credit that you are either
drawing on or perhaps paying back to minimize your interest expense. Okay? Because you have to realize that there's a
lot of companies that their busiest months might be the month that they have the least
amount of cash, right? Okay. Because if they're selling things on credit,
they won't get it until the next month yet they have a lot of employees to pay and they
have a lot of vendors to pay and those sort of things, right? Okay. Good question. So yeah, this is a little different situation
from just taking out a loan that we had talked about with the longterm notes payable.

Good question. All right, any other questions? Okay. That's it for Exercise 22.1. Let's take a look at Quick Study, was it 225? >>Yes. >>All righty. Let's take a look. Quick Study 225, let's see where that is. Is this Lighthouse Company? Okay. All right, Lighthouse Company anticipates
total sales for June and July of 420,000 and 398,000 respectively. Cash sales are normally 60% of total sales. Okay, well if cash sales are 60% in total
sales, credit sales are what percent of total sales? 40. Of the credit sales, 20% are collected in
the same month as the sale. 70% are collected during the first month after
the sale. And the remaining 10% are collected in the
second month. Determine the amount of accounts receivable
reported on the company's budgeted balance sheet as of July 31st. Okay? All right, we can do that. Let's take a look. All right. Now this is kind of one of those, well first
of all, did anybody get the answer? You got an answer, you don't know if it's
the answer.

What'd you get? >>388,240? >>No, but that's all right. I'm glad you did it. I'm glad you worked on your homework. Did anybody get a different answer? >>144,160? >>144,160 that is. Yeah, now everybody's going, yeah, that's
what I got too. Yeah. Okay, let's take a look. Let's take a look at this. All right. Let's analyze this thing. Okay, let's take a look at our months. We're going to look at June and July, okay? Let me make sure that's on there. I'm going to zoom in a little bit too. Oops, wrong way. Okay, June and July. What are our total sales for those months? >>420,000 and 398,000? >>$420,000 and $398,000, correct? Okay, what are our credit sales? You correctly told me that cash, if cash sales
are 60% of total sales, then credit sales are $40%, right? So 40% times 420,000 is? $168,000.

And 40% times 398,000 is? $159,200. You with me? Okay, now let's analyze the collection pattern
of our receivables, okay? It says 20% are collected in the same month
as the sale. 70% are collected during the first month after
the sale and the remaining 10% are collected in the second month. So it's a 20, 70, 10 right? So for June it's 20%, 70%, 10%. 20% in June, right? Pardon? >>You're off the screen whatever you just
wrote. >>A little bit, oh, thank you. 20% in June, 70% in July, and 10% in August,
correct? Okay, for July, it's the same 20%, 70%, 10%,
right? But it's 20% in July, 70% in August, 10% in
September; is that correct? Now we have to ask ourselves, what are we
trying to solve here? What are they asking for? We're used to asking about cash receipts. But we're not asking about cash receipts are
we? We're asking what? We are asking A/R at what date? >>July 31st. >>We are asking what is our accounts receivable
at July 31st, okay? Well, so my question to you is this. For June, 20% came in on June. 70% came in on July. So what is the oh, let me see what I'm going
to call this column: Percent still uncollected at July 31st.

Yeah, what is the percent still uncollected
at July 31st of these June sales. That came in on June. That came in during July so it's 10%, isn't
it?; is that correct? All right, so that's 10%. Okay? Same question for July sales, what is the
percent still uncollected at July 31st? Well, this came in on July but these amounts
are going to come in on August and September, correct? So the percent still uncollected is 80%. You with me? Everybody see how we got that? So now we're going to say the amount still
uncollected at July 31st. That would be 10% times 186,000, which is

And 80% times 159,200 which is, oh let me
do that in my head, I think it's 127,360. The
total of those is 144,160. Now what is that? Let's title that up. Estimated accounts receivable at July 31st. You with me? So that is the computation of budgeted accounts
receivable balance as of July 31st. Okay, hopefully I wasn't too messy for you
there. Does that make sense, guys? Okay. Does that make sense? All right, it makes me wish that I had another
one that we could work on in class.

I do. I do have one. So what I want to do now is, let's do this
Cooper Company Handout. Okay? Let's do this Cooper Company Handout. And you folks at home, work on this while
they play the music and then we will go over the answer. This is a very, very similar problem, it's
just different numbers but I wanted you to have some additional practice.

So, we'll see you in a few minutes. (Music) hello. Okay, let's go over the answers. I'm not going to read through it because you
just read it, hopefully. And I'm not going to spend a lot of time working
through it because it really is the same rationale, isn't it? Okay, so let's take a look here. This is a situation zoom in a little bit there. The answer's 402,300, I should have titled
that up, but that would be the estimated accounts receivable at 1,231, right? I should have put that title there.

Here's the total sales. Cash sales are 20% of total sales so credit
sales are 80% of that number. And the percent still uncollected, you have
to analyze the collectability pattern for our Cooper Company, right? And their collection pattern is 25%, 60%,
15%. So the percent uncollected at 1,231 is 15
and 75% respectively. Take those, times the credit sales and we
get the total uncollected at 1,231, okay? Everybody get that? It's a lot easier the second time, right? Okay. See, you learn something today. It's been a good day. All right, any questions on that one? Pretty selfexplanatory but I'm happy to answer
questions if you have them. Okay. All right, I want to work on another one here
in class. I know we were doing a lot of stuff in class
but I think I found that this is just the best way to learn this stuff is to have you
do a lot of work while we're here and then we can go over it right away. Okay, let's take a look in your books at Exercise
22.14, okay? Exercise 22.14.

All right? This one right here. All right. Okay. Let's read through that. Foyert Company requires a minimum $30,000
cash balance. If necessary, loans are taken to meet this
requirement at a cost of 1% per month paid monthly. Any excess cash is used to repay loans at
monthend. The cash balance on October 1st is 30,000
and the company has an outstanding loan of $10,000. Forecasted cash receipts, other than for loans
received, and forecasted cash payments, other than for loan or interest payments, follow. Prepare a cash budget for October, November
and December. Round interest payments to the nearest whole
dollar. Okay, this is the same situation as we did
previously with, I think it was Kayak Co, okay? Interest is paid based on the loan at the
beginning of the month.

The loan balance at the beginning of the month. But let's go ahead and spend some time in
class while they play that music, and let's just do another one of these. Let's do this one right now, Exercise 22.14. And then after a little while, after a little
while we will go over it. Okay? See you in a little bit. (Music)
Okay. Let's go over that. Taking a look at the screen, okay. Our beginning balance is 30,000, right? Cash receipts are 110. So cash available is 140. Cash disbursements are 120. We have interest on the bank loan, right? They say it's a 1% monthly rate. So 1% of 10,000 is 100. So our preliminary cash balance is 19,900,
right? So we have to have our discussion, right? What's the amount that we have to have in
there? The minimum amount is what? >>30,000. >>30,000, we don't have that, do we? So we have to get an additional loan from
the bank of 10,100.

That brings us up to a 30,000 ending cash
balance and thus, what's our loan balance at the end of the month? >>2,100. >>2,100, did you all get that? Sometimes people accidentally say 10,100 but
we had 10,000 at the beginning of the month, right? So the 10,000 plus the 10,100 is the 20,100. Make sense? Okay. Any questions on January? Or sorry, October? Okay, let's take a look at the next month. All right, November. Well, this balance goes up there, 30,000. The cash receipts are 80. The cash available is thus 110. Cash disbursements are 75. Now we have some more interest, don't we? Okay, what's November's interest? It's 20,100 times 1% which is 201, right? So our preliminary cash balance is 34,799;
is that correct? Okay. All right. Can we do we have at least 30,000? Do we? >>Yes.

>>Yeah, that number's higher than 30,000,
very good. So can we pay some loan back? >>Yeah. >>How much can we pay back but still have
at least 30,000? >>4,799. >>4,799. That takes us to 30,000. And what's our loan at the end of the month? >>15,301.
>>15,301 which is the 20,100 minus the 4,799 equals 15,301; is that correct? Okay. Okay, last month, December, beginning balance
is 30,000. Our cash receipts are 100,000. Cash available is 130. Cash disbursements of 80. What's our interest? >>153. >>$153.01 okay, I think they told you to round
to the nearest dollar, okay? So that's what we did, okay. $153, 1% times 15,301. Round it up. That gives us a cash balance of 49,847. Do we have at least 30,000? Yeah. So can we afford to pay some back? We can actually pay the entire amount back,
right? And that still gives us 34,546 which is above
the 30,000 minimum required.

So what's our balance at the end of the of
the month for the loan? Zero. Okay? Make sense? Okay. Okay, questions on that? >>Yeah. Well, I've had more time to think about it
and I kind of realize it's probably just oversimplified. But if you're taking additional loans from
the bank, you wouldn't be paying one interest expense on it, would you? >>You don't well, yeah, let's talk about that
a little bit.

If you take an additional loan from the bank,
in this example, you don't pay interest you pay interest on the beginning of the period
loan balance. Let me say that a little bit better. You compute interest like, take a look at
this. Let's just look at an example. You pay interest based on the loan balance
at the beginning of the period. Now, we hadn't borrowed that yet. Okay, so we don't pay interest on that until
the next period. Does that make sense? Okay. Now you had asked another question when the
cameras were off and you said, this doesn't seem like a loan.

Right? Because think about it, now we did have some
repayment here but if we would had been short here, if we had been below 30,000 showing
the number, if we were to had been below 30,000 for November, we couldn't have repaid back,
we would've had to get more loan, right? And then that could have occurred for December,
we could had been below that as well. So we could've easily had a scenario where
we didn't repay any loan for 3 months. Now that doesn't seem like a loan that you're
used to. If you don't pay your house payment for 3
months, your car payment for 3 months, you're going to be in some sort of trouble, right? This is a different situation.

This is a line of credit. And they recognize that you're drawing on
it and you're paying towards it as needed, okay? As needed. Now there's probably, in the loan agreement,
something that says if you go, like, 9 months without paying any, you know, principal back,
maybe something kicks in or something. Okay, this is probably collateralized. I know in the previous one there was a limit
on how much you could borrow, was there in this one? >>No. >>Okay, I know the previous problem we did
that they said there was like a ceiling, you can't borrow any more than this, okay? But this is not your typical loan where you
have a periodic payment of the same amount, okay? >>So then what if you can't borrow up to 30,000? Or what if you can't get up to 30,000? >>You mean because you've hit your loan limit? Then you're in trouble. Then you probably got to deal with secondary
crediting sources which are probably going to be more expensive. >>Yeah. >>Okay. So, and a good bank would advise you before
you get to that point, okay? In a way you can almost think of this as kind
of a little bit, I hate to say it because a line of credit is a natural thing and it's
a healthy thing for a business, Whereas, a credit card is not necessarily.

But think of your credit card, right? You take money out or you buy things on credit
as needed and then when you have excess money you pay it back, right? You do have to make a minimum payment which
covers some interest. But it's kind of more like a credit card except
without the exorbitant interest rate. Are you with me? All right, take a look at that one more time. Any questions on Foyert Company? Okay, let's call it a day, does that sound
good? I'm going to give you this will be your last
homework assignment for Chapter 22 on budgeting.

And then next period we'll go over this homework
and we'll start Chapter 23, and that will be the last chapter we cover in this class. So, this is the homework that I would like
you to do for next time please. Quick Study 22.13, Exercise 22.3, 22.17 and
22.18, okay? These take a little longer, all right? I haven't given you much homework, these take
a little longer. I want you to do them, don't just, at the
first sign of trouble, throw your pencil down and think oh, Krug will show me how to do
it. Okay? I want you to make a good, honest effort to
get all that done, all right? Hey, we'll see you later.

Have a great day, okay? Byebye..

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