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	$	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.

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

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 $126,700.

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 $96,600.

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

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

8. 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.

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

Required 1 :
Schedule of Expected Cash Collection
	April	May	June	Quarter
Cash sales	$ 138,000 {690,000*20%}	$ 172,000 {860,000*20%}	$ 114,000 {570,000*20%}	$ 424,000
Sales on Account :
February	$42,400 {265,000*80%*20%}			$ 42,400
March	$156,800 {280,000*80%*70%}	$44,800 {280,000*80%*20%}		$ 201,600
April	$55,200 {690,000*80%*10%}	$386,400 {690,000*80%*70%}	$110,400 {690,000*80%*20%}	$ 552,000
May		$86,000 {860,000*80%*10%}	$481,600 {860,000*80%*70%}	$ 567,600
June			$45,600 {570,000*80%*10%}	$ 45,600
Total Cash collections	$ 392,400	$ 689,200	$ 751,600	$ 1,833,200

Required 2 A :
Inventory Purchases Budget
	April	May	June	July
Budgeted Cost of Goods Sold	$ 483,000	$ 602,000	$ 399,000	$ 329,000
Add: Desired Ending Inventory	$ 120,400     {602,000*20%}	$ 79,800     {399,000*20%}	$ 65,800     {329,000*20%}
Total Needs	$ 603,400	$ 681,800	$ 464,800
Less: Beginning Inventory	($96,600)	($ 120,400)     {602,000*20%}	($ 79,800)     {399,000*20%}
Required Inventory Purchases	$ 506,800	$ 561,400	$ 385,000

Required 2 B :
Schedule of Expected Cash Disbursements in Inventory
	April	May	June	Quarter
Accounts Payable, March 31	$ 126,700			$ 126,700
April Purchases	$ 253,400      {506,800*50%}	$ 253,400      {506,800*50%}		$ 506,800
May Purchases		$ 280,700      {561,400*50%}	$ 280,700      {561,400*50%}	$ 561,400
June Purchases			$ 192,500     {385,000*50%}	$ 192,500
Total Cash Disbursements	$ 380,100	$ 534,100	$ 473,200	$ 1,387,400

Required 3 :
Garden Sales Inc.
Cash Budget
For the Quarter ended June 30
	April	May	June	Quarter
Beginning Cash Balance	$ 58,000	$ 40,000	$ 40,000	$ 58,000
Add: Collections from customers	$ 392,400	$ 689,200	$ 751,600	$ 1,833,200
Total Cash Available	$ 450,400	$ 729,200	$ 791,600	$ 1,891,200
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
Administrative Expenses	$19,500      {48,500 -29,000}	$36,600      {65,600 -29,000}	$13,200      {42,200 -29,000}	$ 69,300
Purchase of Land	$ 0	$ 44,000	$ 0	$ 44,000
Dividend paid	$ 36,000	$ 0	$ 0	$ 36,000
Total Cash Disbursements	($522,600)	($720,700)	$ 554,400	$ 1,797,700
Excess(Deficiency)of cash available over disbursements	($72,200)    {450,400 -522,600}	$ 8,500    {729,200 -720,700}	$ 237,200 {791,600-554,400}	$93,500
Financing :
Borrowings	$ 112,200	$ 31,500		$ 143,700
Repayments			($ 143,700 )	($ 143,700 )
Interest			($3,996)   {See Note 1 Below }	($3,996)
Total Financing	$ 112,200	$ 31,500	($ 147,696)
Ending cash Balance	$ 40,000	$ 40,000	$ 89,504	$ 89,504

Explanation :

Note 1 :

Interest expenses at the end of Quarter :

Interest expenses = ($112,200 *1%*3 months )+ ($31,500 *1%*2 months)

Interest expenses = $ 3,366 + $ 630

Interest expenses = $ 3,996