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	$	580,000	$	1,080,000	$	540,000	$	440,000
   Cost of goods sold		406,000		756,000		378,000		308,000
   Gross margin		174,000		324,000		162,000		132,000
   Selling and administrative expenses:
   Selling expense		107,000		103,000		65,000		44,000
   Administrative expense*		47,000		63,200		39,800		42,000
   Total selling and administrative expenses		154,000		166,200		104,800		86,000
   Net operating income	$	20,000	$	157,800	$	57,200	$	46,000

   *Includes $26,000 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 $250,000, and March’s sales totaled $265,000.

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 $114,800.

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 $81,200.

6. Dividends of $33,000 will be declared and paid in April.

7. Land costing $41,000 will be purchased for cash in May.

8. The cash balance at March 31 is $55,000; 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.

The company’s president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revises the cash collection and ending inventory assumptions as follows:

a. Sales continue to be 20% for cash and 80% on credit. However, credit sales from April, May, and June are collected over a three-month period with 25% collected in the month of sale, 65% collected in the month following sale, and 10% in the second month following sale. Credit sales from February and March are collected during the second quarter using the collection percentages specified in the main section.

b. The company maintains its ending inventory levels for April, May, and June at 15% of the cost of merchandise to be sold in the following month. The merchandise inventory at March 31 remains $81,200 and accounts payable for inventory purchases at March 31 remains $114,800.

Required:

1. Using the president’s new assumptions in (a) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total.

2. Using the president’s new assumptions in (b) above, 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. Using the president’s new assumptions, prepare a cash budget for April, May, and June, and
for the quarter in total.

Answer 1

1)

Schedule of Expected Cash Collections
	April	May	June	Quarter
Collection from February Sales (80%*Feb Sales*20%)	40,000.00			40,000.00
Collection from March Sales (80%*Mar Sales*70%)	148,400.00			148,400.00
Collection from April Sales	232,000.00	301,600.00	46,400.00	580,000.00
Collection from May Sales		432,000.00	561,600.00	993,600.00
Collection from June Sales			216,000.00	216,000.00
Total Cash Collections	420,400.00	733,600.00	824,000.00	1,978,000.00

2 a)

Merchandise Purchase Budget
	April	May	June	Quarter
Cost of Goods Sold	406,000.00	756,000.00	378,000.00	1,540,000.00
Desired Ending Inventory (15% of cost of goods sold in the following month)	113,400.00	56,700.00	46,200.00	216,300.00
Total needs	519,400.00	812,700.00	424,200.00	1,756,300.00
Beginning Inventory	(81,200.00)	(113,400.00)	(56,700.00)	(251,300.00)
Required Purchases	438,200.00	699,300.00	367,500.00	1,505,000.00

2b)

Schedule of Cash Disbursements for Purchases
	April	May	June	Quarter
Disbursement for Accounts Payable on Mar 30	114,800.00			114,800.00
Cash paid for purchased merchandise in April	219,100.00	219,100.00		438,200.00
Cash paid for purchased merchandise in May		349,650.00	349,650.00	699,300.00
Cash paid for purchased merchandise in June			183,750.00	183,750.00
Dividends paid in cash	33,000.00			33,000.00
Land purchased		41,000.00		41,000.00
Selling expense	107,000.00	103,000.00	65,000.00	275,000.00
Administrative expense	21,000.00	37,200.00	13,800.00	72,000.00
Total Cash Disbursements	494,900.00	749,950.00	612,200.00	1,857,050.00

3)

Cash Budget
	April	May	June	Quarter
Opening Balance	55,000.00	40,500.00	40,150.00	55,000.00
Total Cash Collections from sales and account receivable	420,400.00	733,600.00	824,000.00	1,978,000.00
Bank Loan	60,000.00	16,000.00	-	76,000.00
Total Cash Receipts	480,400.00	749,600.00	824,000.00	2,054,000.00
Total Cash Disbursements	494,900.00	749,950.00	612,200.00	1,857,050.00
Interest on bank loan	-	-	2,120.00	2,120.00
Bank Loan Repaid	-	-	76,000.00	76,000.00
Closing Cash Balance	40,500.00	40,150.00	173,830.00	173,830.00