Question

Skolt Products, Inc., is a merchandising company that sells binders, paper, and other school supplies. The company is planning its cash needs for the third quarter. In the past, Skolt Products has had to borrow money during the third quarter to support peak sales of back-to-school materials, which occur during August. The following information has been assembled to assist in preparing a cash budget for the quarter: a. Budgeted monthly absorption costing income statements for July–October are as follows: July August September October Sales $ 42,000 $ 72,000 $ 52,000 $ 47,000 Cost of goods sold 25,200 43,200 31,200 28,200 Gross margin 16,800 28,800 20,800 18,800 Selling and administrative expenses: Selling expense 7,400 11,900 8,700 7,500 Administrative expense* 5,800 7,400 6,300 6,100 Total selling and administrative expenses 13,200 19,300 15,000 13,600 Net operating income $ 3,600 $ 9,500 $ 5,800 $ 5,200 *Includes $2,000 depreciation each month. b. Sales are 20% for cash and 80% on credit. c. Credit sales are collected over a three-month period with 10% collected in the month of sale, 65% in the month following sale, and 25% in the second month following sale. May sales totaled $32,000, and June sales totaled $38,000. d. 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 for inventory purchases at June 30 total $12,300. e. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $18,900. f. Land costing $4,700 will be purchased in July. g. Dividends of $1,200 will be declared and paid in September. h. The cash balance on June 30 is $7,000; the company must maintain a cash balance of at least this amount at the end of each month. i. The company has an agreement with a local bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $60,000. 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 July, August, and September and for the quarter in total. (Do not round intermediate calculations.) 2. Prepare the following for merchandise inventory: a. A merchandise purchases budget for July, August, and September. (Do not round intermediate calculations.) b. A schedule of expected cash disbursements for merchandise purchases for July, August, and September and for the quarter in total.

Answer 1

1.Schedule of expected cash collections for the Following months:
Particulars	May$	June $	July$	August$	September$	October$
Total credit sales (refer working note)	25600	30400	33600	57600	41600	37600
Cash collections:
10% amount will be collected in the month of sale	2560	3040	3360	5760	4160	3760
65% amount will be collected in the following month	0	16640	19760	21840	37440	27040
25% amount will be collected in the second following month	0	0	6400	7600	8400	14400
			29520	35200	50000
Total Expected cash collections for the month of Juy, August & September				114720
Working note 1
Calculation of credit sales:
Particulars	May$	June $	July$	August$	September$	October$
Total sales of each month	32000	38000	42000	72000	52000	47000
20% for cash	6400	7600	8400	14400	10400	9400
80% for credit	25600	30400	33600	57600	41600	37600

2.(a):A merchandise purchase budget:
Particulars	July$	August$	September$
Cost of goods sold	25200	43200	31200
2.(b): A schedule of expected cash disbursement:
Particulars	July$	August$	September$
Opening payables	12300
Cost of goods sold	25200	43200	31200
50% will be paid in the month of purchase	12600	21600	15600
50% will be paid in the next month of purchase	12300	12600	21600
	24900	34200	37200
Total expected cash disbursements		96300