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	$	600,000	$	900,000	$	500,000	$	400,000
Cost of goods sold		420,000		630,000		350,000		280,000
Gross margin		180,000		270,000		150,000		120,000
Selling and administrative expenses:
Selling expense		79,000		120,000		62,000		51,000
Administrative expense*		45,000		52,000		41,000		38,000
Total selling and administrative expenses		124,000		172,000		103,000		89,000
Net operating income	$	56,000	$	98,000	$	47,000	$	31,000

*Includes $20,000 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 $200,000, and March’s sales totaled $300,000.

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 $126,000.

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 $84,000.

Dividends of $49,000 will be declared and paid in April.

Land costing $16,000 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

1

Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total.

Facts	April	May	June	Quarter Totals
Cash Sales	120,000	180,000	100,000	400,000
February 200,000	200,000 x 80% x 20% = 32,0000			32,000
March 300,000	300,000 x 80% x 70% = 168,000	300,000 x 80% x 20% =48,000		48,000
April 600,000	600,000 x 80% x 10% = 48,000	600,000 x 80% x 70% = 336,000	600,000 x 80% x 20% = 96,000	480,000
May 900,000		900,000 x 80% x 10% = 72,000	900,000 x 80% x 20% = 96,000	576,000
June 500,000			500,000 x 80% x 10% = 40,000	40,000
Total Cash Collections	$368,000	$636,000	$740,000	$1,744,000

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2.

Prepare the following for merchandise inventory:

a. A merchandise purchases budget for April, May, and June.

Facts	April	May	June
Cost of goods sold	420,000	630,000	350,000
Add: Ending merchandise inventory	630,000 x 20% = 126,000	350,000 x 20% = 70,000	280,000 x 20% = 56,000
Total needs	546,000	700,000	406,000
Less: Beg Merchandise Inventory	420,000 x 20% = 84,000	630,000 x 20% = 126,000	350,000 x 20% = 70,000
Required inventory Purchases	$462,000	$574,000	$336,000

Cost of goods in July is $280,000, so June 20% is calculated for the next month sales. Required inventory, purchases are $462,000 for April, $574,000 for May, and June $336,000

_____________________________________________

b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total.

Facts	April	May	June	Quarter Total
Accounts Payable	126,000			126,000
April purchase 462,000	462,000 x 50% = 231,000	462,000 x 50% = 231,000		462,000
May Purchase 574,000		574,000 x 50% = 287,000	574,000 x 50% = 287,000	574,000
June Purchase 336,000			336,000 x 50% 168,000	168,000
Total Cash Disbursements	$375,000	$518,000	$455,000	$1,330,000

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3.

Prepare a cash budget for April, May, and June as well as in total for the quarter.

Facts	April	May	June	Quarter Total
Beg. Cash Balance	52,000	40,000	40,000	52,000
Add: Collections from Customers	368,000	636,000	740,000	1,744,000
Total Cash Available	420,000	676,000	780,000	1,796,000
Less: Cash disbursements
Purchase for inventory	357,000	518,000	455,000	$1,330,000
Selling expenses	79,000	120,000	62,000	261,000
Administrative expenses	25,000	32,000	21,000	78,000
Land Purchases		16,000		16,000
Dividends paid	49,000			49,000
Total Cash Disbursements	510,000	686,000	538,000	1,734,000
Excess (deficiency) of cash available over disbursements	(90,000)	(10,000)	242,000	62,000
Borrowings	130,000	50,000		180,000
Repayments			(180,000)	(180,000)
interest ($130,000 x 1% x 3 + $50,000 x 1% x 2)			(4,900)	(4,900)
Total financing	130,000	50,000	(184,900)	(4,900)
Ending Cash balance	$40,000	$40,000	$57,100	$57,100