Question

Problem 7-22A Cash Budget with Supporting Schedules [LO7-2, LO7-4, LO7-8]

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:

  

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

	April		May		June		July
Sales	$	550,000	$	700,000	$	225,000	$	350,000
Cost of goods sold		385,000		490,000		157,500		245,000
Gross margin		165,000		210,000		67,500		105,000
Selling and administrative expenses:
Selling expense		75,000		119,000		27,500		35,000
Administrative expense*		42,500		68,000		25,000		33,000
Total selling and administrative expenses		117,500		187,000		52,500		68,000
Net operating income	$	47,500	$	23,000	$	15,000	$	37,000

*Includes $14,500 of depreciation each month.

   

b.	Sales are 20% for cash and 80% on account.
c.	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 $125,000, and March’s sales totaled $225,000.
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 at March 31 for inventory purchases during March total $101,500.
e.	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 $77,000.
f.	Dividends of $25,000 will be declared and paid in April.
g.	Land costing $33,000 will be purchased for cash in May.
h.	The cash balance at March 31 is $47,000; the company must maintain a cash balance of atleast $40,000 at the end of each month.
i.	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			110000	140000	45000	295000
Sales on account
February	(100000*10%)		10000			10000
March	(180000*80%;10%)		144000	18000		162000
April	(440000*10%;80%;10%)		44000	352000	44000	440000
May	(560000*10%;80%)			56000	448000	504000
June	(180000*10%)				18000	18000
Total cash collections			308000	566000	555000	1429000
2)		Merchandise purchase budget
			April	May	June
Budgeted cost of goods sold			385,000	490,000	157,500
Add: ending inventory			98000	31500	49000
Total needs			483,000	521,500	206,500
less:Beginning inventory			77,000	98,000	31,500
Required inventory purchases			406,000	423,500	175,000
b)	Schedule of Expected Cash Disbursements for Merchandise purchase
			April	May	June	Quarter
Beginning accounts payable			101,500			101,500
April purchases			203000	203000		406000
May purchases				211750	211750	423500
June purchases					87500	87500
total cash disbursements			304,500	414750	299250	1,018,500
3)			Cash budget
				April	May	June	Quarter
Beginning cash balance				47,000	40,500	40,250	47,000
Add collections from customers				308000	566000	555000	1429000
total cash available				355,000	606500	595250	1476000
less cash Disbursements
purchase of inventory				304,500	414750	299250	1,018,500
selling expenses				75,000	119,000	27,500	221,500
administrative expenses				28000	53500	10500	92000
land purchases				0	33,000	0	33000
dividends paid				25,000	0	0	25,000
total cash disbursements				432,500	620250	337250	1,390,000
Excess(Deficiency)of cash available				-77,500	-13750	258000	86,000
Financing
Borrowing				118,000	54,000	0	172,000
Repayment				0	0	-172,000	-172000
interest				0	0	-4,620	-4620
total financing				118,000	54,000	-176620	-4,620
ending cash balance				40,500	40,250	81380	81,380
		interest = 118000*1%*3			3540
			54000*1%*2		1080
					4620