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	$	600,000	$	900,000	$	500,000	$	400,000
Cost of goods sold		420,000		630,000		350,000		280,000
Gross margin		180,000		270,000		150,000		120,000
Selling and administrative expenses:
Selling expense		79,000		120,000		62,000		51,000
Administrative expense*		45,000		52,000		41,000		38,000
Total selling and administrative expenses		124,000		172,000		103,000		89,000
Net operating income	$	56,000	$	98,000	$	47,000	$	31,000

*Includes $20,000 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 $200,000, 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 $126,000.

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 $84,000.

6. Dividends of $49,000 will be declared and paid in April.

7. Land costing $16,000 will be purchased for cash in May.

8. The cash balance at March 31 is $52,000; 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.

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.

Answer 1

1.

Schedule of Expected Cash Collections
	April	May	June	Quarter
Cash Sales	$ 120,000	$ 180,000	$ 100,000	$ 400,000
Collection of credit sales
February	32,000			32,000
March	168,000	48,000		216,000
April	48,000	336,000	96,000	480,000
May		72,000	504,000	576,000
June			40,000	40,000
Total Cash Collections	368,000	636,000	740,000	1,744,000

2.a.

Merchandise Purchases Budget
	April	May	June
Cost of Goods Sold	$ 420,000	$ 630,000	$ 350,000
Add: Desired Ending Inventory	126,000	70,000	56,000
Total Inventory Needed	546,000	700,000	406,000
Less: Beginning Inventory	84,000	126,000	70,000
Budgeted Cost of Merchandise Purchases	462,000	574,000	336,000

b.

Schedule of Expected Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
March purchases	$ 126,000			126,000
April purchases	231,000	231,000		462,000
May purchases		287,000	287,000	574,000
June purchases			168,000	168,000
Total Cash Disbursements	357,000	518,000	455,000	1,330,000

3.

Garden Sales Inc.
Cash Budget
For the months of April, May and June
	April	May	June	Quarter
Beginning Cash Balance	$52,000	$40,000	$40,000	$ 52,000
Add: Cash Receipts	368,000	636,000	740,000	1,744,000
Total Cash Available	420,000	676,000	780,000	1,796,000
Less: Cash Disbursements for
Merchandise Purchases	357,000	518,000	455,000	1,330,000
Selling Expenses	79,000	120,000	62,000	261,000
Administrative Expenses	25,000	32,000	21,000	78,000
Dividends	49,000	0	0	49,000
Purchase of Land	0	16,000	0	16,000
Total Cash Disbursements	510,000	686,000	538,000	1,734,000
Excess of Cash Available over Cash Disbursements	(90,000)	(10,000)	242,000	62,000
Financing
Borrowing	130,000	50,000		180,000
Repayment			(180,000)	(180,000)
Interest			(4,900)	(4,900)
Total Financing	130,000	180,000	0
Ending Cash Balance	$40,000	$40,000	$57,100	$57,100