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	$	690,000		$	860,000		$	570,000		$	470,000
Cost of goods sold		483,000			602,000			399,000			329,000
Gross margin		207,000			258,000			171,000			141,000
Selling and administrative expenses:
Selling expense		87,000			106,000			68,000			47,000
Administrative expense*		48,500			65,600			42,200			45,000
Total selling and administrative expenses		135,500			171,600			110,200			92,000
Net operating income	$	71,500		$	86,400		$	60,800		$	49,000

*Includes $29,000 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 $265,000, and March’s sales totaled $280,000.

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 $126,700.

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 $96,600.

Dividends of $36,000 will be declared and paid in April.

Land costing $44,000 will be purchased for cash in May.

The cash balance at March 31 is $58,000; 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. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Answer 1

Cash Receipts Budget	April	May	June	Totals
Sales	690000	860000	570000	2120000
80% of the sales are on credit	552000	688000	456000	1696000
Cash sales	138000	172000	114000	424000
Cash Collections:
In the month of sales	55200	68800	45600	169600
1 Month Prior	156800	386400	481600	1024800
2 Months Prior	42400	44800	110400	197600
Total Collections	254400	500000	637600	1392000
Purchases Budget	April	May	June	Totals
Cost of Goods Sold	483000	602000	399000	1484000
Desired Ending Inventory	120400	79800	65800
Total Needs	603400	681800	464800	1750000
Beginning Inventory	96600	120400	79800
Total Purchases	506800	561400	385000	1453200
Cash Disbursements	April	May	June	Totals
Purchases	506800	561400	385000	1453200
Payments for Purchases:
Current Month	253400	280700	192500	726600
1 Month Prior	126700	253400	280700	660800
Total	380100	534100	473200	1387400
Cash Budget	April	May	June	Totals
Cash Receipts
Cash sales	138000	172000	114000	424000
Collection from customers	254400	500000	637600	1392000
Total cash receipts	392400	672000	751600	1816000
Cash Disbursements
Payment for purchases	380100	534100	473200	1387400
Selling expense	87000	106000	68000	261000
Cash Administrative expenses	19500	36600	13200	69300
Dividends	36000			36000
land purchase		44000		44000
Total disbursements	522600	720700	554400	1797700
Excess/(Deficiency)	-130200	-48700	197200	18300
of Cash
Beginning Balance	58000	11800	10100	58000
Borrowing/(Repayments) on Line of Credit	84000	47000	-131000	0
Interest paid			-3460	-3460
Ending Cash Balance	11800	10100	72840	72840