Question

Problem 8-24 Cash Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8]

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	$	510,000	$	710,000	$	410,000	$	310,000
Cost of goods sold		357,000		497,000		287,000		217,000
Gross margin		153,000		213,000		123,000		93,000
Selling and administrative expenses:
Selling expense		71,000		91,000		52,000		31,000
Administrative expense*		40,500		53,600		32,600		29,000
Total selling and administrative expenses		111,500		144,600		84,600		60,000
Net operating income	$	41,500	$	68,400	$	38,400	$	33,000

*Includes $13,000 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; 80% collected in the first month following the month of sale; and the remaining 10% collected in the second month following the month of sale. February’s sales totaled $145,000, and March’s sales totaled $205,000.

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 $93,100.

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 $71,400.

6. Dividends of $21,000 will be declared and paid in April.

7. Land costing $29,000 will be purchased for cash in May.

8. The cash balance at March 31 is $43,000; 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.

2B.Prepare the following for merchandise inventory, a schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total.

	Schedule of Expected Cash Disbursements for Merchandise Purchases April May June Quarter Beginning accounts payable $ April purchases May purchases June purchases Total cash disbursements $ $ $ $

3.

Prepare a cash budget for April, May, and June as well as in total for the quarter. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Garden Sales, Inc. Cash Budget For the Quarter Ended June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Purchases for inventory Selling expenses Administrative expenses Land purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayment Interest Total financing Ending cash balance $ $ $ $

Answer 1

Required 1 :
Garden Sales Inc.
Schedule of Expected Cash Collections
For the Quarter Ended June 30
	April	May	June	Quarter
Cash sales (20%)	$102,000 {510,000*20%}	$142,000 {710,000*20%}	$82,000 {410,000*20%}	$ 326,000
Sales on accounts:
February	$11,600 {145,000*80%*10%}			$ 11,600
March	$131,200 {205,000*80%*80%}	$16,400 {205,000*80%*10%}		$ 147,600
April	$40,800 {510,000*80%*10%}	$326,400 {510,000*80%*80%}	$40,800 {510,000*80%*10%}	$ 408,000
May		$56,800 {710,000*80%*10%}	$454,400 {710,000*80%*80%}	$ 511,200
June			$32,800 {410,000*80%*10%}	$ 32,800
Total Cash Collections	$ 285,600	$ 541,600	$ 610,000	$1,437,200

Required 2 A:
Garden Sales Inc.
Merchandise Purchase Budget
For the Quarter Ended June 30
	April	May	June	Quarter
Budgeted Cost of goods sold	$ 357,000	$ 497,000	$ 287,000	$ 1,141,000
Add: Desired Inventory (20% of Next Month COGS)	$99,400     {497,000*20%}	$57,400      {287,000*20%}	$43,400      {217,000*20%}	$ 200,200
Total Needed	$ 456,400	$ 554,400	$ 330,400	$ 1,341,200
Less: Beginning Inventory	($71,400) {Given }	($99,400)    {497,000*20%}	($57,400 )    {287,000*20%}	($228,200)
Required Inventory Purchases	$ 385,000	$ 455,000	$ 273,000	$ 1,113,000

Required 2 B :
Garden Sales Inc.
Expected Cash Disbursements for Merchandise Purchases
For the Quarter Ended June 30
	April	May	June	Quarter
Beginning Accounts Payable , March 31	$ 93,100			$ 93,100
April Purchases	$192,500 {$385,000*50%}	$192,500 {$385,000*50%}		$ 385,000
May Purchases		$227,500 {$455,000*50%}	$227,500 {$455,000*50%}	$ 455,000
June Purchases			$136,500 {$273,000*50%}	$ 136,500
Total Cash Disbursements	$ 285,600	$ 420,000	$ 364,000	$ 1,069,600

Required 3 :
Garden Sales Inc.
Cash Budget
For the Quarter Ended June 30
	April	May	June	Quarter
Beginning Cash Balances	$ 43,000	$ 40,500	$ 40,500	$ 124,000
Add: Collections from Customers (See Required 1 )	$ 285,600	$ 541,600	$ 610,000	$1,437,200
Total Cash available (A)	$ 328,600	$ 582,100	$ 650,500	$ 1,561,200
Less: Cash Disbursements
Purchase of Inventory (See required 2 B)	$ 285,600	$ 420,000	$ 364,000	$ 1,069,600
Selling Expenses	$ 71,000	$ 91,000	$ 52,000	$ 214,000
Administrative Expenses	$27,500   {40,500-13,000}	$40,600   {53,600-13,000}	$19,600   {32,600-13,000}	$ 87,700
Land Purchases		$ 29,000		$ 29,000
Dividend Paid	$ 21,000			$ 21,000
Total Cash Disbursements (B)	$ 405,100	$ 580,600	$ 435,600	$ 1,421,300
Excess (Deficiency) of Cash available over disbursements{C= (A-B)}	($76,500) {328,600-405,100}	$1,500    {582,100-580,600}	$214,900   {650,500-435,600}	$ 139,900
Financing :
Borrowings	$ 117,000 {76,500+40,500}	$ 39,000		$ 156,000
Repayments			($ 156,000)	($ 156,000)
Interest			($ 4,290) {Calculated Below}	($ 4,290)
Total Financing	$ 117,000	$ 39,000	($160,290)	($160,290)
Ending Cash Balances	$ 40,500 {76,500-117,000}	$ 40,500 {1500+39,000}	$ 54,610	$ 54,610

Note 1 :

Interest = ($117,000*1%*3 Months) + ($39,000*1%*2 Months )

Interest = $ 3,510 + $ 780

Interest = $ 4,290