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	$	810,000	$	950,000	$	650,000	$	560,000
Cost of goods sold		567,000		665,000		455,000		392,000
Gross margin		243,000		285,000		195,000		168,000
Selling and administrative expenses:
Selling expense		95,000		114,000		76,000		56,000
Administrative expense*		52,500		74,200		47,000		53,000
Total selling and administrative expenses		147,500		188,200		123,000		109,000
Net operating income	$	95,500	$	96,800	$	72,000	$	59,000

*Includes $37,000 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 $305,000, and March’s sales totaled $320,000.

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 $146,300.

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 $113,400.

6. Dividends of $44,000 will be declared and paid in April.

7. Land costing $56,000 will be purchased for cash in May.

8. The cash balance at March 31 is $66,000; 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.

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

Solution 1:
Schedule of expected cash collection - Garden Sales
Particulars	April	May	June	Quarter
Cash sales(20%)	$162,000.00	$190,000.00	$130,000.00	$482,000.00
Sales on Account:(80%)
February	$48,800.00			$48,800.00
March	$179,200.00	$51,200.00		$230,400.00
April	$64,800.00	$453,600.00	$129,600.00	$648,000.00
May		$76,000.00	$532,000.00	$608,000.00
June			$52,000.00	$52,000.00
Total Cash Collection	$454,800.00	$770,800.00	$843,600.00	$2,069,200.00
Solution 2a:
Merchandise Purchase Budget
Particulars	April	May	June
Budgeted Cost of goods sold	$567,000.00	$665,000.00	$455,000.00
Add: Desired ending inventory (20% of COGS of next month)	$133,000.00	$91,000.00	$78,400.00
Total needs	$700,000.00	$756,000.00	$533,400.00
Less: Opening Inventory	$113,400.00	$133,000.00	$91,000.00
Required Inventory purchases	$586,600.00	$623,000.00	$442,400.00
Solution 2b:
Schedule of expected cash disbursement for merchandise purchases
Particulars	April	May	June	Total
Beginning accounts payable	$146,300.00			$146,300.00
April Purchases	$293,300.00	$293,300.00		$586,600.00
May Purchases		$311,500.00	$311,500.00	$623,000.00
June Purchases			$221,200.00	$221,200.00
Total cash disbursement	$439,600.00	$604,800.00	$532,700.00	$1,577,100.00
Solution 3:
Cash Budget - Garden Sales Inc. For the quarter ended June 30
Particulars	April	May	June	Quarter
Opening Cash balance	$66,000.00	$40,700.00	$40,500.00	$66,000.00
Add: Collection from customers	$454,800.00	$770,800.00	$843,600.00	$2,069,200.00
Total Cash Available	$520,800.00	$811,500.00	$884,100.00	$2,135,200.00
Less - Cash Disbursement:
Purchases For Inventory	$439,600.00	$604,800.00	$532,700.00	$1,577,100.00
Selling expenses	$95,000.00	$114,000.00	$76,000.00	$285,000.00
Administrative expenses	$15,500.00	$37,200.00	$10,000.00	$62,700.00
Land Purchases	$0.00	$56,000.00	$0.00	$56,000.00
Dividend paid	$44,000.00	$0.00	$0.00	$44,000.00
Total Cash disbursement	$594,100.00	$812,000.00	$618,700.00	$2,024,800.00
Excess (deficiency) of cash available over disbursements	-$73,300.00	-$500.00	$265,400.00	$110,400.00
Financing:
Borrowings	$114,000.00	$41,000.00	$0.00	$155,000.00
Repayments	$0.00	$0.00	-$155,000.00	-$155,000.00
Interest	$0.00	$0.00	-$4,240.00	-$4,240.00
Total Financing	$114,000.00	$41,000.00	-$159,240.00	-$4,240.00
Ending cash balance	$40,700.00	$40,500.00	$106,160.00	$106,160.00