Question

In: Accounting

Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter....

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 $ 560,000 $ 760,000 $ 460,000 $ 360,000
Cost of goods sold 392,000 532,000 322,000 252,000
Gross margin 168,000 228,000 138,000 108,000
Selling and administrative expenses:
Selling expense 76,000 96,000 57,000 36,000
Administrative expense* 43,000 57,600 35,600 34,000
Total selling and administrative expenses 119,000 153,600 92,600 70,000
Net operating income $ 49,000 $ 74,400 $ 45,400 $ 38,000

*Includes $18,000 of depreciation each month.

  1. Sales are 20% for cash and 80% on account.

  2. 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 $175,000, and March’s sales totaled $230,000.

  3. 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 $103,600.

  4. 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 $78,400.

  5. Dividends of $26,000 will be declared and paid in April.

  6. Land costing $34,000 will be purchased for cash in May.

  7. The cash balance at March 31 is $48,000; the company must maintain a cash balance of at least $40,000 at the end of each month.

  8. 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.

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.

Solutions

Expert Solution

1) Schedule of Expected cash collection
April May June Quarter
Cash sales 112000 152000 92000 356000
Sales on account
February (175000*80%*10%) 14000 14000
March (230000*80%*80%;10%) 147200 18400 165600
April (448000*10%;80%;10%) 44800 358400 44800 448000
May (608000*10%;80%) 60800 486400 547200
June (368000*10%) 36800 36800
Total cash collections 318000 589600 660000 1567600
2) Merchandise purchase budget
April May June
Budgeted cost of goods sold 392,000 532,000 322,000
Add: ending inventory 106400 64400 50400
Total needs 498,400 596,400 372,400
less:Beginning inventory 78,400 106,400 64,400
Required inventory purchases 420,000 490,000 308,000
b) Schedule of Expected Cash Disbursements for Merchandise purchase
April May June Quarter
Beginning accounts payable 103,600 103,600
April purchases 210000 210000 420000
May purchases 245000 245000 490000
June purchases 154000 154000
total cash disbursements 313,600 455000 399000 1,167,600
3) Cash budget
April May June Quarter
Beginning cash balance 48,000 40,400 40,400 48,000
Add collections from customers 318000 589600 660000 1567600
total cash available 366,000 630000 700400 1615600
less cash Disbursements
purchase of inventory 313,600 455000 399000 1,167,600
selling expenses 76,000 96,000 57,000 229,000
administrative expenses 25000 39600 17600 82200
land purchases 0 34,000 0 34000
dividends paid 26,000 0 0 26,000
total cash disbursements 440,600 624600 473600 1,538,800
Excess(Deficiency)of cash available -74,600 5400 226800 76,800
Financing
Borrowing 115,000 35,000 0 150,000
Repayment 0 0 -150000 -150000
interest 0 0 -4,150 -4150
total financing 115,000 35,000 -154150 -4,150
ending cash balance 40,400 40,400 72650 72,650
interest = 115000*1%*3 3450
35000*1%*2 700
4150

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Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter....
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Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter....
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Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter....
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Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter....
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Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter....
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