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	$	640,000	$	1,140,000	$	600,000	$	500,000
Cost of goods sold		448,000		798,000		420,000		350,000
Gross margin		192,000		342,000		180,000		150,000
Selling and administrative expenses:
Selling expense		119,000		109,000		71,000		50,000
Administrative expense*		50,000		68,000		44,000		48,000
Total selling and administrative expenses		169,000		177,000		115,000		98,000
Net operating income	$	23,000	$	165,000	$	65,000	$	52,000

*Includes $32,000 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 $280,000, and March’s sales totaled $295,000.

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 $127,400.

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 $89,600.

6. Dividends of $39,000 will be declared and paid in April.

7. Land costing $47,000 will be purchased for cash in May.

8. The cash balance at March 31 is $61,000; 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 $89,600 and accounts payable for inventory purchases at March 31 remains $127,400.

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

Solution

1.

Estimated Cash Collection( In $)
Particulars	April	May	June	Quarter
Cash Sales	$     1,28,000.00	$   2,28,000.00	$      1,20,000.00	$   4,76,000.00
Sales in account	$     5,12,000.00	$   9,12,000.00	$      4,80,000.00
February	$        44,800.00			$      44,800.00
March	$     1,65,200.00	$      47,200.00		$   2,12,400.00
April	$     1,28,000.00	$   3,32,800.00	$         51,200.00	$   5,12,000.00
May		$   2,28,000.00	$      5,92,800.00	$   8,20,800.00
June			$      1,20,000.00	$   1,20,000.00
Total Cash Collection	$     4,66,000.00	$   8,36,000.00	$      8,84,000.00	$ 21,86,000.00

2a.

Merchandise Purchase Budget ( In $)
Particulars	April	May	June	Quarter
COGS	$     4,48,000.00	$   7,98,000.00	$      4,20,000.00	$ 16,66,000.00
Add: Closing Stock (15%)	$     1,19,700.00	$      63,000.00	$         52,500.00	$      52,500.00
Total Needs	$     5,67,700.00	$   8,61,000.00	$      4,72,500.00	$ 17,18,500.00
Less: Opening Stock	$        89,600.00	$   1,19,700.00	$         63,000.00	$      89,600.00
Required Inventory purchases	$     4,78,100.00	$   7,41,300.00	$      4,09,500.00	$ 16,28,900.00

2b.

Expected cash disbursements for merchandise purchases
Particulars	April	May	June	Total
Accounts Payable	$     1,27,400.00			$   1,27,400.00
April purchases	$     2,39,050.00	$   2,39,050.00		$   4,78,100.00
May purchases		$   3,70,650.00	$      3,70,650.00	$   7,41,300.00
June purchases			$      2,04,750.00	$   2,04,750.00
Total cash disbursements	$     3,66,450.00	$   6,09,700.00	$      5,75,400.00	$ 15,51,550.00

3.

Expected Cash Budget ( In $)
Particulars	April	May	June	Quarter
Beginning balance	$        61,000.00	$      40,550.00	$         40,290.00	$      61,000.00
Add: Collection from customers	$     4,66,000.00	$   8,36,000.00	$      8,84,000.00	$ 21,86,000.00
Total Cash Available	$     5,27,000.00	$   8,76,550.00	$      9,24,290.00	$ 22,47,000.00
Less: Cash Disbursments
Purchase of inventory	$     3,66,450.00	$   6,09,700.00	$      5,75,400.00	$ 15,51,550.00
Selling expense	$     1,19,000.00	$   1,09,000.00	$         71,000.00	$   2,99,000.00
aAdministrative expenses	$        18,000.00	$      36,000.00	$         12,000.00	$      66,000.00
land purchases		$      47,000.00		$      47,000.00
dividends paid	$        39,000.00			$      39,000.00
Total cash disbursments	$     5,42,450.00	$   8,01,700.00	$      6,58,400.00	$ 20,02,550.00
Excess/(deficiency) of cash available over disbursements	$      -15,450.00	$      74,850.00	$      2,65,890.00	$   2,44,450.00
Financing
Borrowings	$        56,000.00	$                   -	$                      -	$      56,000.00
Repayments	$                    -	$     -34,000.00	$        -22,000.00	$     -56,000.00
Interest	$                    -	$          -560.00	$             -220.00	$          -780.00
Total Financing	$        56,000.00	$     -34,560.00	$        -22,220.00	$          -780.00
Ending Cash balance	$        40,550.00	$      40,290.00	$      2,43,670.00	$   2,43,670.00