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:

  

Budgeted monthly absorption costing income statements for April–July are:

	April			May			June			July
Sales	$	520,000		$	720,000		$	420,000		$	320,000
Cost of goods sold		364,000			504,000			294,000			224,000
Gross margin		156,000			216,000			126,000			96,000
Selling and administrative expenses:
Selling expense		72,000			92,000			53,000			32,000
Administrative expense*		41,000			54,400			33,200			30,000
Total selling and administrative expenses		113,000			146,400			86,200			62,000
Net operating income	$	43,000		$	69,600		$	39,800		$	34,000

*Includes $14,000 of depreciation each month.

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

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 $150,000, and March’s sales totaled $300,000.

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 $120,400.

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 $72,800.

Dividends of $22,000 will be declared and paid in April.

Land costing $30,000 will be purchased for cash in May.

The cash balance at March 31 is $44,000; the company must maintain a cash balance of at least $40,000 at the end of each month.

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

	1)			Schedule of Expected cash collection
				April	May	June	Quarter
	Cash sales			104000	144000	84000	332000
	Sales on account
	February	(150000*80%*10%)		12000			12000
	March	(300000*80%*80%;10%)		192000	24000		216000
	April	(416000*10%;80%;10%)		41600	332800	41600	416000
	May	(576000*10%;80%)			57600	460800	518400
	June	(336000*10%)				33600	33600
	Total cash collections			349600	558400	620000	1528000
	2)		Merchandise purchase budget
				April	May	June
	Budgeted cost of goods sold			364,000	504,000	294,000
	Add: ending inventory			100800	58800	44800
	Total needs			464,800	562,800	338,800
	less:Beginning inventory			72,800	100,800	58,800
	Required inventory purchases			392,000	462,000	280,000
	b)	Schedule of Expected Cash Disbursements for Merchandise purchase
				April	May	June	Quarter
	Beginning accounts payable			120,400			120,400
	April purchases			196000	196000		392000
	May purchases				231000	231000	462000
	June purchases					140000	140000
	total cash disbursements			316,400	427000	371000	1,114,400
	3)			Cash budget
					April	May	June	Quarter
	Beginning cash balance				44,000	40,200	40,200	44,000
	Add collections from customers				349600	558400	620000	1528000
	total cash available				393,600	598600	660200	1572000
	less cash Disbursements
	purchase of inventory				316,400	427000	371000	1,114,400
	selling expenses				72,000	92,000	53,000	217,000
	administrative expenses				27000	40400	19200	86600
	land purchases				0	30,000	0	30000
	dividends paid				22,000	0	0	22,000
	total cash disbursements				437,400	589400	443200	1,470,000
	Excess(Deficiency)of cash available				-43,800	9200	217000	102,000
	Financing
	Borrowing				84,000	31,000	0	115,000
	Repayment				0	0	-115000	-115000
	interest				0	0	-3,140	-3140
	total financing				84,000	31,000	-118140	-3,140
	ending cash balance				40,200	40,200	98860	98,860
			interest = 84000*1%*3			2520
				31000*1%*2		620
						3140