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	$	740,000	$	920,000	$	620,000	$	530,000
Cost of goods sold		518,000		644,000		434,000		371,000
Gross margin		222,000		276,000		186,000		159,000
Selling and administrative expenses:
Selling expense		92,000		111,000		73,000		53,000
Administrative expense*		51,000		69,600		45,200		50,000
Total selling and administrative expenses		143,000		180,600		118,200		103,000
Net operating income	$	79,000	$	95,400	$	67,800	$	56,000

*Includes $34,000 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 $290,000, and March’s sales totaled $305,000.

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 $137,200.

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 $103,600.

Dividends of $41,000 will be declared and paid in April.

Land costing $49,000 will be purchased for cash in May.

The cash balance at March 31 is $63,000; 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

1. Schedule of expected cash collections :

	April	May	June	Quarter
Cash Sales	$ 148,000	$ 184,000	$ 124,000	$ 456,000
Collection of credit sales of
February	46,400	0	0	46,400
March	170,800	48,800	0	219,600
April	59,200	414,400	118,400	592,000
May	0	73,600	515,200	588,800
June	0	0	49,600	49,600
Expected cash collections	$ 424,400	$ 720,800	$ 807,200	$ 1,952,400

2. a. Merchandise Purchases Budget :

	April	May	June
Cost of Goods Sold	$ 518,000	$ 644,000	$ 434,000
Add: Desired Ending Inventory	128,800	86,800	74,200
Total Inventory Needs	$ 646,800	730,800	508,200
Less: Beginning Inventory	103,600	128,800	86,800
Expected Merchandise Purchases	$ 543,200	$ 602,000	$ 421,400

b. Schedule of expected cash disbursements for merchandise purchases:

	April	May	June	Quarter
Cash disbursements for purchases of
March	$ 137,200	0	0	$ 137,200
April	271,600	271,600	0	543,200
May	0	301,000	301,000	602,000
June	0	0	210,700	210,700
Total expected cash disbursements	$ 408,800	$ 572,600	$ 511,700	$ 1,493,100

3. Garden Sales Inc.

Cash Budget

For April, May, June and Quarter

	April	May	June	Quarter
	$	$	$	$
Beginning cash balance	63,000	40,600	40,200	63,000
Add: Expected cash collections	424,400	720,800	807,200	1,952,400
Total cash available	487,400	761,400	847,400	2,015,400
Less: Cash disbursements for
Merchandise Purchases	408,800	572,600	511,700	1,493,100
Selling Expenses	92,000	111,000	73,000	276,000
Administrative Expenses	17,000	35,600	11,200	63,800
Dividends	41,000	0	0	41,000
Land	0	49,000	0	49,000
Total cash disbursements	558,800	768,200	595,900	1,922,900
Cash surplus ( deficiency)	(71,400)	(6,800)	251,500	92,500
Financing
Borrowing	112,000	47,000		159,000
Repayment			(159,000)	(159,000)
Interest			(4,300)	(4,300)
Total Financing	112,000	159,000	(163,300)
Ending cash balance	40,600	40,200	88,200	88,200