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	$	730,000	$	910,000	$	610,000	$	520,000
Cost of goods sold		511,000		637,000		427,000		364,000
Gross margin		219,000		273,000		183,000		156,000
Selling and administrative expenses:
Selling expense		91,000		110,000		72,000		52,000
Administrative expense*		50,500		68,800		44,600		49,000
Total selling and administrative expenses		141,500		178,800		116,600		101,000
Net operating income	$	77,500	$	94,200	$	66,400	$	55,000

*Includes $33,000 of depreciation each month

1.

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:

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 $285,000, and March’s sales totaled $300,000.

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 $135,100.

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 $102,200.

6. Dividends of $40,000 will be declared and paid in April.

7. Land costing $48,000 will be purchased for cash in May.

8. The cash balance at March 31 is $62,000; 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.

.

	Schedule of Expected Cash Collections April May June Quarter Cash sales $0 Sales on account: February 0 March 0 April    0 May 0 June 0 Total cash collections $0 $0 $0 $0

2. Prepare the following for merchandise inventory:

a. A merchandise purchases budget for April, May, and June.

	Merchandise Purchases Budget April May June Total needs 0 0 0 Required inventory purchases $0 $0 $0

b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total.

	Schedule of Expected Cash Disbursements for Merchandise Purchases April May June Quarter $0 April purchases 0 May purchases 0 June purchases 0 Total cash disbursements $0 $0 $0 $0

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.)

Garden Sales, Inc. Cash Budget For the Quarter Ended June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available 0 0 0 0 Less cash disbursements: Purchases for inventory Selling expenses Administrative expenses Land purchases Dividends paid Total cash disbursements 0 0 0 0 Excess (deficiency) of cash available over disbursements 0 0 0 0 Financing: Borrowings Repayment Interest Total financing 0 0 0 0 Ending cash balance $0 $0 $0 $0

Answer 1

Cash collections schedule
	April	May	June	Quarter
Cash Sales	$     146,000	$      182,000	$        122,000	$    450,000
Credit Sales Collection
Feb Sales	$        45,600			$      45,600
Mar Sales	$     168,000	$        48,000		$    216,000
April Sales	$        58,400	$      408,800	$        116,800	$    584,000
May Sales		$        72,800	$        509,600	$    582,400
June Sales			$          48,800	$      48,800
Total Cash Collections	$     418,000	$     711,600	$        797,200	$1,926,800

Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted cost of goods sold	$     511,000	$      637,000	$        427,000	$ 1,575,000
Add desired ending inventory	$     127,400	$        85,400	$          72,800	$      72,800
Total needs	$     638,400	$      722,400	$        499,800	$ 1,647,800
Less beginning inventory	$     102,000	$      127,400	$          85,400	$    102,000
Required purchases	$     536,400	$     595,000	$        414,400	$1,545,800

Schedule of Expected Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
Accounts Payable, Mar 31	$     135,100			$    135,100
April purchases	$     268,200	$      268,200		$    536,400
May purchases		$      297,500	$        297,500	$    595,000
June purchases			$        207,200	$    207,200
Total cash disbursements for purchases	$     403,300	$     565,700	$        504,700	$1,473,700

Cash Budget
	April	May	June	Quarter
Beginning Balance	$        62,000	$        40,200	$          40,300	$      62,000
Cash Collections	$     418,000	$      711,600	$        797,200	$ 1,926,800
Total Cash Available	$     480,000	$      751,800	$        837,500	$ 1,988,800
Cash Disbursements
Purchases	$     403,300	$      565,700	$        504,700	$ 1,473,700
Selling Expense	$        91,000	$      110,000	$          72,000	$    273,000
Administrative Expense	$        17,500	$        35,800	$          11,600	$      64,900
Dividend paid	$        40,000			$      40,000
Land Purchases		$        48,000		$      48,000
Total Cash Disbursements	$     551,800	$      759,500	$        588,300	$ 1,899,600
Preliminary Ending Balance	$      -71,800	$         -7,700	$        249,200	$      89,200
Financing
Borrowings	$     112,000	$        48,000		$    160,000
Repayment			$      -160,000	$ -160,000
Interest			$           -4,320	$       -4,320
Total Financing	$     112,000	$        48,000	$      -164,320	$       -4,320
Ending Balance	$       40,200	$        40,300	$          84,880	$      84,880