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	$	650,000	$	820,000	$	530,000	$	430,000
Cost of goods sold		455,000		574,000		371,000		301,000
Gross margin		195,000		246,000		159,000		129,000
Selling and administrative expenses:
Selling expense		83,000		102,000		64,000		43,000
Administrative expense*		46,500		62,400		39,200		41,000
Total selling and administrative expenses		129,500		164,400		103,200		84,000
Net operating income	$	65,500	$	81,600	$	55,800	$	45,000

*Includes $25,000 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 $245,000, and March’s sales totaled $260,000.

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 $118,300.

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 $91,000.

6. Dividends of $32,000 will be declared and paid in April.

7. Land costing $40,000 will be purchased for cash in May.

8. The cash balance at March 31 is $54,000; 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.

Answer 1

Particulars	April	May	June
Opening cash balance	54000	29100	346700
Cash sales	130000	164000	106000
Credit sales:
Same month-10%	52000	656000	8480
Next month-70%	145600	364000	459200
Following next month-20%	39200	41600	104000
Inventory purchases:(WN1)
Same month-50%	336900	389700	258000
Next month-50%	118300	336900	389700
Dividend	32000
Land		40000
Total administration and selling expenses	104500	139400	78200
Bank loan taken	200000	-	-
Bank loan repaid	-	-	200000
Interest on bank loan	-	2000	2000
Closing cash balance	29100 (Maximum loan taken still not able to meet minimum cash balance)	346700	96480

WN1:

Calculation of Purchases

Particulars	April	May	June
Sales	650000	820000	530000
Add: Closing inventory	114800	74200	60200
Less: Opening inventory	91000	114800	74200
Purchases	673800	779400	516000

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