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:

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

	April		May		June		July
Sales	$	690,000	$	860,000	$	570,000	$	470,000
Cost of goods sold		483,000		602,000		399,000		329,000
Gross margin		207,000		258,000		171,000		141,000
Selling and administrative expenses:
Selling expense		87,000		106,000		68,000		47,000
Administrative expense*		48,500		65,600		42,200		45,000
Total selling and administrative expenses		135,500		171,600		110,200		92,000
Net operating income	$	71,500	$	86,400	$	60,800	$	49,000

*Includes $29,000 of depreciation each month.

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

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 $265,000, and March’s sales totaled $280,000.

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 $126,700.

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 $96,600.

Dividends of $36,000 will be declared and paid in April.

Land costing $44,000 will be purchased for cash in May.

The cash balance at March 31 is $58,000; the company must maintain a cash balance of at least $40,000 at the end of each month.

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.

Required:

1. Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total.

2. 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. Prepare a cash budget for April, May, and June as well as in total for the quarter.

Answer 1

Required Budgets are as prepared below:

Garden Sales inc.
Sales Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Quarter
Sales	690,000	860,000	570,000	2,120,000
Total Sales	$690,000	$860,000	$570,000	$2,120,000
	552000	688000	456000
Garden Sales inc.
Schedule of expected Cash collections
For the quarter ended June 30
	Month
Particulars	April	May	June	Quarter
February Credit Sales (265,000*80%*20%)	42,400			42,400
March Credit Sales	156,800	44,800		201,600
April Cash Sales (20%)	138,000			138,000
April credit Sales	55,200	386,400	110,400	552,000
May cash sales		172,000		172,000
May Credit Sales		68,800	481,600	550,400
June Cash sales			114,000	114,000
June credit Sales			45,600	45,600
Total collections	392,400	672,000	751,600	1,816,000
Garden Sales inc.
Purchase Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Quarter
Cost of goods sold	483,000	602,000	399,000	1,484,000
Planned ending inventory (b)	120,400	79,800	65,800	65,800
Beginning inventory (c )	96,600	120,400	79,800	96,600
Total Purchases	$506,800	$561,400	$385,000	$1,453,200
Garden Sales inc.
Schedule of expected Cash payments
For the quarter ended June 30
	Month
Particulars	April	May	June	Quarter
Beginning Accounts Payable (a)	$126,700			$126,700
April Purchases (b)	$253,400	$253,400		$506,800
May Purchases (c )		$280,700	$280,700	$561,400
June Purchases (d)			$192,500	$192,500
Total payments (a+b+c+d)	$380,100	$534,100	$473,200	$1,387,400
Garden Sales inc.
Cash Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Quarter
Beginning Cash balance	58,000	40,800	40,100	58,000
Add: Budgeted Cash receipts	$392,400	$672,000	$751,600	1,816,000
cash available for use	$450,400	$712,800	$791,700	$1,874,000
Less: cash Disbursements
Purchase for Inventory	$380,100	$534,100	$473,200	$1,387,400
Selling expenses	87,000	106,000	68,000	261,000
Administration expenses	19,500	36,600	13,200	69,300
Land purchase		44,000		44,000
Dividend paid	36,000			36,000
Total disbusrement	522,600	720,700	554,400	1,797,700
Cash surplus/Deficit	-72,200	-7,900	237,300	76,300
Financing
Borrowing	113,000	48,000		161,000
Repayment			-161,000	-161,000
Interest			-2,740	-2,740
Net cash from Financing	113,000	48,000	163,740	-2,740
Budgeted ending cash balance	40,800	40,100	73,560	73,560