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 $ 610,000 $ 800,000 $ 510,000 $ 410,000 Cost of goods sold 427,000 560,000 357,000 287,000 Gross margin 183,000 240,000 153,000 123,000 Selling and administrative expenses: Selling expense 81,000 100,000 61,000 41,000 Administrative expense* 45,500 60,800 38,000 39,000 Total selling and administrative expenses 126,500 160,800 99,000 80,000 Net operating income $ 56,500 $ 79,200 $ 54,000 $ 43,000 *Includes $23,000 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 $220,000, and March’s sales totaled $250,000. 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 $112,700. 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 $85,400. Dividends of $30,000 will be declared and paid in April. Land costing $38,000 will be purchased for cash in May. The cash balance at March 31 is $52,000; 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

Solution 1:

Schedule of Expected Cash Collection
Particulars	April	May	June	Quarter Total
Cash Sales	$122,000.00	$160,000.00	$102,000.00	$384,000.00
Collection on Account:
Collection of credit sales of April	$48,800.00	$341,600.00	$97,600.00	$488,000.00
Collection of credit sales of May	$0.00	$64,000.00	$448,000.00	$512,000.00
Collection of credit sales of June	$0.00	$0.00	$40,800.00	$40,800.00
Collection of credit sales of February	$35,200.00	$0.00	$0.00	$35,200.00
Collection of credit sales of March	$140,000.00	$40,000.00	$0.00	$180,000.00
Total Expected Cash Collection	$346,000.00	$605,600.00	$688,400.00	$1,640,000.00

Solution 2a:

Merchandise Purchase Budget
Particulars	April	May	June
Cost Of Goods Sold	$427,000.00	$560,000.00	$357,000.00
Add: Desired ending inventory (20% of next month Cost of merchandise sold)	$112,000.00	$71,400.00	$57,400.00
Less: Opening Inventory	$85,400.00	$112,000.00	$71,400.00
Merchandise Purchase	$453,600.00	$519,400.00	$343,000.00

Solution 2b:

Computation of expected cash disbursement for merchandise purchase
Particulars	April	May	June	Quarter Total
For purchases in April	$226,800.00	$226,800.00	$0.00	$453,600.00
For purchases in May	$0.00	$259,700.00	$259,700.00	$519,400.00
For purchases in June	$0.00	$0.00	$171,500.00	$171,500.00
For Account Payables of March Purchases	$112,700.00	$0.00	$0.00	$112,700.00
Total expected cash disbursement for merchandise purchase	$339,500.00	$486,500.00	$431,200.00	$1,257,200.00

Solution 3:

Cash Budget
Particulars	April	May	June	Quarter Total
Beginning Cash Balance	$52,000.00	$40,000.00	$40,000.00	$52,000.00
Expected Cash collection	$346,000.00	$605,600.00	$688,400.00	$1,640,000.00
Cash Available	$398,000.00	$645,600.00	$728,400.00	$1,692,000.00
Cash Payments:
Expected Cash disbursement for Merchandise purchases	$339,500.00	$486,500.00	$431,200.00	$1,257,200.00
Selling Expenses	$81,000.00	$100,000.00	$61,000.00	$242,000.00
Administrative Expenses (net of Depreciation)	$22,500.00	$37,800.00	$15,000.00	$75,300.00
Equipment Purchases	$0.00	$38,000.00	$0.00	$38,000.00
Dividends	$30,000.00	$0.00	$0.00	$30,000.00
Total Cash Payments	$473,000.00	$662,300.00	$507,200.00	$1,642,500.00
Balance before financing	-$75,000.00	-$16,700.00	$221,200.00	$49,500.00
Borrowings	$115,000.00	$56,700.00	$0.00	$171,700.00
Principal repayments	$0.00	$0.00	$171,700.00	$171,700.00
Interest	$0.00	$0.00	$2,867.00	$2,867.00
Ending cash balance	$40,000.00	$40,000.00	$46,633.00	$46,633.00