Question

Problem 7-22A Cash Budget with Supporting Schedules [LO7-2, LO7-4, LO7-8] 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: a. Budgeted monthly absorption costing income statements for April–July are: April May June July Sales $ 550,000 $ 700,000 $ 225,000 $ 350,000 Cost of goods sold 385,000 490,000 157,500 245,000 Gross margin 165,000 210,000 67,500 105,000 Selling and administrative expenses: Selling expense 75,000 119,000 27,500 35,000 Administrative expense* 42,500 68,000 25,000 33,000 Total selling and administrative expenses 117,500 187,000 52,500 68,000 Net operating income $ 47,500 $ 23,000 $ 15,000 $ 37,000 *Includes $14,500 of depreciation each month. b. Sales are 20% for cash and 80% on account. c. 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 $125,000, and March’s sales totaled $225,000. d. 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 $101,500. e. 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 $77,000. f. Dividends of $25,000 will be declared and paid in April. g. Land costing $33,000 will be purchased for cash in May. h. The cash balance at March 31 is $47,000; the company must maintain a cash balance of atleast $40,000 at the end of each month. i. 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. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Answer 1

Garden Sales Inc.
Schdeule of expected cash collections
	April	May	June	Totals
Sales	550000	700000	225000	1475000
80% of the sales are on credit	440000	560000	180000	1180000
Cash sales	110000	140000	45000	295000
Cash Collections:
In the month of sales	44000	56000	18000	118000
1 Month Prior	144000	352000	448000	944000
2 Months Prior	10000	18000	44000	72000
Collection from credit sales	198000	426000	510000
Total Collections	308000	566000	555000	1429000
Purchases Budget	April	May	June	Totals
Cost of Goods Sold	385000	490000	157500	1032500
Desired Ending Inventory	98000	31500	49000
Total Needs	483000	521500	206500	1211000
Beginning Inventory	77000	98000	31500
Total Purchases	406000	423500	175000	1004500
Cash Disbursements	April	May	June	Totals
Purchases	406000	423500	175000	1004500
Payments for Purchases:
Current Month	203000	211750	87500	502250
1 Month Prior	101500	203000	211750	516250
Total	304500	414750	299250	1018500
Cash Budget	April	May	June	Totals
Cash Receipts
Cash sales	110000	140000	45000	295000
Collection from customers	198000	426000	510000	1134000
Total cash receipts	308000	566000	555000	1429000
Cash Disbursements
Payment for purchases	304500	414750	299250	1018500
Selling expense	75000	119000	27500	221500
Cash Administrative expenses	28000	53500	10500	92000
Dividends	25000			25000
land purchase		33000		33000
Total disbursements	432500	620250	337250	1390000
Excess/(Deficiency) of cash	-124500	-54250	217750	39000
Beginning Balance	47000	40500	40250	47000
Borrowing/(Repayments) on Line of Credit	118000	54000	-172000	0
Interest paid			-4620	-4620
Ending Cash Balance	40500	40250	81380	81380