Question

Problem 8-24 Cash Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8]

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	$	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.

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; 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.

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.

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.

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

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

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.

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

SOLUTION

1. Schedule of expected cash collections

	April ($)	May ($)	June ($)	Quarter ($)
Cash sales (20%)	130,000	164,000	106,000	400,000
Sales of February ($245,000*80%*20%)	39,200			39,200
Sales of March ($260,000*80%*70%),($260,000*80%*20%)	145,600	41,600		187,200
Sales of April ($650,000*80%*10%),($650,000*80%*70%),($260,000*80%*20%)	52,000	364,000	104,000	520,000
Sales of May ($820,000*80%*10%),($820,000*80%*70%)		65,600	459,200	524,800
Sales of June ($530,000*80%*10%)			42,400	42,400
Total cash collections	366,800	635,200	711,600	1,713,600

2A. A merchandise purchases budget

Particulars	April ($)	May ($)	June ($)	Quarter ($)
Budgeted cost of goods sold	455,000	574,000	371,000	1,400,000
Add: Desired ending inventory	114,800	74,200	60,200	249,200
Total needs	569,800	648,200	431,200	1,649,200
Less: Beginning inventory	(91,000)	(114,800)	(74,200)	(280,000)
Required purchases	478,800	533,400	357,000	1,369,200

Desired ending inventory-

April- 20% * $574,000 = 114,800

May-20% * $371,000 = 74,200

June- 20% * $301,000 = 60,200

2B. Schedule of expected cash disbursements

Particulars	April ($)	May ($)	June ($)	Quarter ($)
Beginning accounts payable (118,300*50%)	59,150			59,150
April purchases (478,800*50%),(478,800*50%)	239,400	239,400		478,800
May purchases (533,400*50%),(533,400*50%)		266,700	266,700	533,400
June purchases(357,000*50%)			178,500	178,500
Total cash disbursements	298,550	506,100	445,200	1,249,850

3. Cash budget

Particulars	April ($)	May ($)	June ($)	Quarter ($)
Cash balance, beginning	54,000	40,000	40,000	134,000
Add: Receipts
Collections from customers	366,800	635,200	711,600	1,713,600
Total cash available (A)	420,800	675,200	751,600	1,847,600
Less: Cash disbursements
Purchase of inventory	298,550	506,100	445,200	1,249,850
Selling expenses	83,000	102,000	64,000	249,000
Administrative expenses	21,500	37,400	14,200	73,100
Land purchases		40,000		40,000
Cash dividends paid	32,000			32,000
Total disbursements (B)	435,050	685,500	523,400	1,643,950
Excess/ deficiency of cash (A-B)	(14,250)	(10,300)	228,200	203,650
Finnacing:
Borrowings	54,250	50,300		104,550
Repayments			(104,550)	(104,550)
Interest (54,250*1%*3)+(50,300*1%*2)			(2,091)	(2,091)
Total financing			(106,641)	(2,091)
Closing cash balance	40,000	40,000	121,559	201,559