Question

Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales of lawn care equipment, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter:

1. Budgeted monthly absorption costing income statements for April–July are:

	April		May		June		July
Sales	$	600,000	$	1,100,000	$	560,000	$	460,000
Cost of goods sold		420,000		770,000		392,000		322,000
Gross margin		180,000		330,000		168,000		138,000
Selling and administrative expenses:
Selling expense		111,000		105,000		67,000		46,000
Administrative expense*		48,000		64,800		41,600		44,000
Total selling and administrative expenses		159,000		169,800		108,600		90,000
Net operating income	$	21,000	$	160,200	$	59,400	$	48,000

*Includes $28,000 of depreciation each month.

2. Sales are 20% for cash and 80% on account.

3. Sales on account are collected over a three-month period with 10% collected in the month of sale; 70% collected in the first month following the month of sale; and the remaining 20% collected in the second month following the month of sale. February’s sales totaled $260,000, and March’s sales totaled $275,000.

4. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $119,000.

5. Each month’s ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $84,000.

6. Dividends of $35,000 will be declared and paid in April.

7. Land costing $43,000 will be purchased for cash in May.

8. The cash balance at March 31 is $57,000; the company must maintain a cash balance of at least $40,000 at the end of each month.

9. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter

The company’s president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revises the cash collection and ending inventory assumptions as follows:

1. Sales continue to be 20% for cash and 80% on credit. However, credit sales from April, May, and June are collected over a three-month period with 25% collected in the month of sale, 65% collected in the month following sale, and 10% in the second month following sale. Credit sales from February and March are collected during the second quarter using the collection percentages specified in the main section.

2. The company maintains its ending inventory levels for April, May, and June at 15% of the cost of merchandise to be sold in the following month. The merchandise inventory at March 31 remains $84,000 and accounts payable for inventory purchases at March 31 remains $119,000.

Required:

1. Using the president’s new assumptions in (a) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total.

2. Using the president’s new assumptions in (b) above, prepare the following for merchandise inventory:

a. A merchandise purchases budget for April, May, and June.

b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June and for the quarter in total.

3. Using the president’s new assumptions, prepare a cash budget for April, May, and June, and
for the quarter in total.

Answer 1

a.

a.
Sales Budget & cash collections	April	May	June	Qtr.
Sales budgeted	600,000	1,100,000	560,000	2,260,000
Cash collections
Cash sales (Mth sales*20%)	120000	220000	112000	452,000
Credit sales of :				0
Feb (260000*80%*20%)	41600			41,600
Mar sales(275000*80%*70%; 20%)	154000	44000		198,000
Apr. sales(600000*80%*10%;70%:20%)	48000	336000	96000	480,000
May sales(1100000*80%*10%; 70%)		88000	616000	704,000
June sales(560000*80%*10%)			44800	44,800
Total collections	363600	688000	868800	1,920,400

Merchandise purchases budget
	April	May	June	Qtr.	July
Cost of goods sold	420,000	770,000	392,000	1,582,000	322,000
Desired Ending Inventory	154000	78400	64400	64400
Total needed	574,000	848,400	456,400	1,646,400
Less: op. Inv.	84000	154000	78400	84000
Purchases	490,000	694,400	378,000	1,562,400
Payment for Inventory purchases:
Mar.(119000*50%)	59500			59,500
Apr.	245000	245000		490,000
May		347200	347200	694,400
June			189000	189,000
Total payment	304500	592200	536200	1,432,900

Cash Budget	April	May	June	Qtr.
Beginning balance	57000	40100	40100	57000
Total sales collections	363600	688000	868800	1920400
Total cash available	420600	728100	908900	1977400
Less: Disbursements:
Purchases payment	304500	592200	536200	1432900
Selling expense	111,000	105,000	67,000	283000
Administrative expense(lessdepn. 28000	20,000	36,800	13,600	70400
Dividends	35000			35000
Land		43000		43000
Total Disbursements	470500	777000	616800	1864300
Surplus/(Deficit)	-49900	-48900	292100	113100
Add: Borrowings	90000	89000		179000
Less: Repayments			-179000	-179000
Less: Interest			-4480	-4480
Ending balance	40100	40100	108620	108620
Interest=((90000*1%*3)+(89000*1%*2))	4480

b.

Sales Budget & cash collections	April	May	June	Qtr.
Sales budgeted	600,000	1,100,000	560,000	2,260,000
Cash collections
Cash sales (Mth sales*20%)	120000	220000	112000	452,000
Credit sales of :				0
Feb (260000*80%*20%)	41600			41,600
Mar sales(275000*80%*70%,20%)	154000	44000		198,000
Apr. sales(600000*80%*25%;65%:10%)	120000	312000	48000	480,000
May sales(1100000*80%*25%; 65%)		27500	572000	599,500
June sales(560000*80%*25%)			112000	112,000
Total collections	435600	603500	844000	1,883,100

Merchandise purchases budget
	April	May	June	Qtr.	July
Cost of goods sold	420,000	770,000	392,000	1,582,000	322,000
Desired Ending Inventory	115500	58800	48300	48300
Total needed	535,500	828,800	440,300	1,630,300
Less: op. Inv.	84000	115500	58800	84000
Purchases	451,500	713,300	381,500	1,546,300
Payment for Inventory purchases:
Mar.(119000*50%)	59500			59,500
Apr.	225750	225750		451,500
May		356650	356650	713,300
June			190750	190,750
Total payment	285250	582400	547400	1,415,050

Cash Budget	April	May	June	Qtr.
Beginning balance	57000	41350	40650	57000
Total sales collections	435600	603500	844000	1883100
Total cash available	492600	644850	884650	1940100
Less: Disbursements:
Purchases payment	285250	582400	547400	1415050
Selling expense	111,000	105,000	67,000	283000
Administrative expense(lessdepn. 28000	20,000	36,800	13,600	70400
Dividends	35000			35000
Land		43000		43000
Total Disbursements	451250	767200	628000	1846450
Surplus/(Deficit)	41350	-122350	256650	93650
Add: Borrowings	0	163000		163000
Less: Repayments			-163000	-163000
Less: Interest			-3260	-3260
Ending balance	41350	40650	90390	90390
Interest = 163000*1%*2 mths=	3260