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 $ 590,000 $ 790,000 $ 490,000 $ 390,000 Cost of goods sold 413,000 553,000 343,000 273,000 Gross margin 177,000 237,000 147,000 117,000 Selling and administrative expenses: Selling expense 80,000 99,000 60,000 39,000 Administrative expense* 44,500 60,000 37,400 37,000 Total selling and administrative expenses 124,500 159,000 97,400 76,000 Net operating income $ 52,500 $ 78,000 $ 49,600 $ 41,000 *Includes $22,000 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; 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 $205,000, and March’s sales totaled $245,000. 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 $109,900. 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 $82,600. Dividends of $29,000 will be declared and paid in April. Land costing $37,000 will be purchased for cash in May. The cash balance at March 31 is $51,000; 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

1.

Schedule of Expected Cash Collections
	April	May	June	Quarter
Cash sales	118000	158000	98000	374000
Sales on account:
February	16400			16400
March	156800	19600		176400
April	47200	377600	47200	472000
May		63200	505600	568800
June			39200	39200
Total cash collections	338400	618400	690000	1646800

2a.

Merchandise Purchases Budget
	April	May	June
Cost of goods sold	413000	553000	343000
Add: Desired ending inventory	110600	68600	54600
Total needs	523600	621600	397600
Less: Beginning inventory	82600	110600	68600
Required inventory purchases	441000	511000	329000

2b.

Schedule of Expected Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
March accounts payable	109900			109900
April purchases	220500	220500		441000
May purchases		255500	255500	511000
June purchases			164500	164500
Total cash disbursements	330400	476000	420000	1226400

3.

Garden Sales Inc.
Cash Budget
For the Quarter Ended June 30
	April	May	June	Quarter
Beginning cash balance	51000	40500	40900	51000
Add collections from customers	338400	618400	690000	1646800
Total cash available	389400	658900	730900	1697800
Less cash disbursements:
Purchases for inventory	330400	476000	420000	1226400
Selling expenses	80000	99000	60000	239000
Administrative expenses	22500	38000	15400	75900
Land purchases		37000		37000
Dividends paid	29000			29000
Total cash disbursements	461900	650000	495400	1607300
Excess (deficiency) of cash available over disbursements	-72500	8900	235500	90500
Financing:
Borrowings	113000	32000		145000
Repayment			-145000	-145000
Interest			-4030	-4030
Total financing	113000	32000	-149030	-4030
Ending cash balance	40500	40900	86470	86470

Interest = ($113000 x 1% x 3) + ($32000 x 1% x 2) = $3390 + $640 = $4030