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:

  

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

	April		May		June		July
Sales	$	510,000	$	660,000	$	205,000	$	310,000
Cost of goods sold		357,000		462,000		143,500		217,000
Gross margin		153,000		198,000		61,500		93,000
Selling and administrative expenses:
Selling expense		71,000		116,500		25,500		31,000
Administrative expense*		40,500		64,400		22,600		29,000
Total selling and administrative expenses		111,500		180,900		48,100		60,000
Net operating income	$	41,500	$	17,100	$	13,400	$	33,000

*Includes $12,500 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 $105,000, and March’s sales totaled $205,000.
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 $93,100.
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 $71,400.
f.	Dividends of $21,000 will be declared and paid in April.
g.	Land costing $29,000 will be purchased for cash in May.
h.	The cash balance at March 31 is $43,000; 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

Answer 1.
Sales Budget
	April	May	June	Total
Sales in $	510,000.00	660,000.00	205,000.00	1,375,000.00
Cash Sales - 20%	102,000.00	132,000.00	41,000.00	275,000.00
Credit Sales - 80%	408,000.00	528,000.00	164,000.00	1,100,000.00
Schedule of Expected Cash Collections from Sales
	April	May	June	Total
Cash Sales	102,000.00	132,000.00	41,000.00	275,000.00
Collection from Accounts Receivables
Feb Sales	10,500.00			10,500.00
March Sales	164,000.00	20,500.00	-	184,500.00
April Sales	40,800.00	326,400.00	40,800.00	408,000.00
May Sales		52,800.00	422,400.00	475,200.00
June Sales Sales			16,400.00	16,400.00
Total cash Collections	317,300.00	531,700.00	520,600.00	1,369,600.00
Answer 2-a.
Merchandise Purchase Budget
	April	May	June	Total
Cost of Goods Sold	357,000.00	462,000.00	143,500.00	962,500.00
Add: Closing Inventory	92,400.00	28,700.00	43,400.00	43,400.00
Total Needs	449,400.00	490,700.00	186,900.00	1,005,900.00
Less: Begnning Inventory	(71,400.00)	(92,400.00)	(28,700.00)	(71,400.00)
Required Purchases	378,000.00	398,300.00	158,200.00	934,500.00
Answer 2-b.
Schedule of Cash payments to Suppliers
	April	May	June	Total
Cash Payment
Accounts Payable - March	93,100.00			93,100.00
April Purchases	189,000.00	189,000.00		378,000.00
May Purchases		199,150.00	199,150.00	398,300.00
June Purchases			79,100.00	79,100.00
Total Cash Payment to Suppliers	282,100.00	388,150.00	278,250.00	948,500.00
Answer 3.
Cash budget
	April	May	June	Total
Opening cash Balance	43,000.00	40,200.00	40,350.00	43,000.00
Add: receipts
Collection from Customers	317,300.00	531,700.00	520,600.00	1,369,600.00
Total Cash available	360,300.00	571,900.00	560,950.00	1,412,600.00
Less: Disbursements
Cash Disbursement - Accounts Payable	282,100.00	388,150.00	278,250.00	948,500.00
Selling & Admn. Exp.:
Selling Expenses	71,000.00	116,500.00	25,500.00	213,000.00
Administrative Expenses	28,000.00	51,900.00	10,100.00	90,000.00
Purchase of Land	-	29,000.00	-	29,000.00
Dividend Paid	21,000.00	-	-	21,000.00
Total Disbursement	402,100.00	585,550.00	313,850.00	1,301,500.00
Cash Balance Closing	(41,800.00)	(13,650.00)	247,100.00	111,100.00
Add: Finance from Bank	82,000.00	54,000.00		136,000.00
Less: Payment to Bank	-		(136,000.00)	(136,000.00)
Less: Payment of interet - Bank loan	-		(3,540.00)	(3,540.00)
Net Cash Balance Closing	40,200.00	40,350.00	107,560.00	107,560.00