Question

Skolt Products, Inc., is a merchandising company that sells binders, paper, and other school supplies. The company is planning its cash needs for the third quarter. In the past, Skolt Products has had to borrow money during the third quarter to support peak sales of back-to-school materials, which occur during August. The following information has been assembled to assist in preparing a cash budget for the quarter:

  

a.	Budgeted monthly absorption costing income statements for July–October are as follows:

	July		August		September		October
Sales	$	42,000	$	72,000	$	52,000	$	47,000
Cost of goods sold		25,200		43,200		31,200		28,200
Gross margin		16,800		28,800		20,800		18,800
Selling and administrative expenses:
Selling expense		7,400		11,900		8,700		7,500
Administrative expense*		5,800		7,400		6,300		6,100
Total selling and administrative expenses		13,200		19,300		15,000		13,600
Net operating income	$	3,600	$	9,500	$	5,800	$	5,200

*Includes $2,000 depreciation each month.

   

b.	Sales are 20% for cash and 80% on credit.
c.	Credit sales are collected over a three-month period with 10% collected in the month of sale, 65% in the month following sale, and 25% in the second month following sale. May sales totaled $32,000, and June sales totaled $38,000.
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 for inventory purchases at June 30 total $12,300.
e.	The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $18,900.
f.	Land costing $4,700 will be purchased in July.
g.	Dividends of $1,200 will be declared and paid in September.
h.	The cash balance on June 30 is $7,000; the company must maintain a cash balance of at least this amount at the end of each month.
i.	The company has an agreement with a local bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $60,000. 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 July, August, and September and for the quarter in total. (Do not round intermediate calculations.)

           

2.	Prepare the following for merchandise inventory:

   

a.	A merchandise purchases budget for July, August, and September. (Do not round intermediate calculations.)

         
   

b.	A schedule of expected cash disbursements for merchandise purchases for July, August, and September and for the quarter in total.

         
   

3.	Prepare a cash budget for July, August, and September and for the quarter in total.

        

Answer 1

Answer 1
Schedule of expected cash collections
	July	August	September	Total
Cash sales	$8,400.00	$14,400.00	$10,400.00	$33,200.00
Credit sale collection
- May Sales	$6,400.00			$6,400.00
- June sales	$19,760.00	$7,600.00		$27,360.00
- July sales	$3,360.00	$21,840.00	$8,400.00	$33,600.00
- August sales		$5,760.00	$37,440.00	$43,200.00
- September sales			$4,160.00	$4,160.00
Expected Cash collections	$37,920.00	$49,600.00	$60,400.00	$147,920.00
Answer 2-a
A merchandise purchases budget for July, August, and September.
	July	August	September	Total
Cost of goods sold	$25,200.00	$43,200.00	$31,200.00	$99,600.00
Add : Ending Inventory	$32,400.00	$23,400.00	$21,150.00	$21,150.00
Less : Beginning Inventory	$18,900.00	$32,400.00	$23,400.00	$18,900.00
Merchandise Purchases	$38,700.00	$34,200.00	$28,950.00	$101,850.00
Answer 2-b
A schedule of expected cash disbursements for merchandise purchases
	July	August	September	Total
Accounts Payable	$12,300.00			$12,300.00
July Purchases	$19,350.00	$19,350.00		$38,700.00
August Purchases		$17,100.00	$17,100.00	$34,200.00
September Purchases			$14,475.00	$14,475.00
Expected Cash Disbursements	$31,650.00	$36,450.00	$31,575.00	$99,675.00
Answer 3
Cash Budget
	July	August	September	Total
Beginning Cash balance	$7,000	$7,320	$7,420	$7,000
Cash collections	$37,920	$49,600	$60,400	$147,920
Total Cash available	$44,920	$56,920	$67,820	$154,920
Cash disbursements
- Purchases	$38,700	$34,200	$28,950	$101,850
- Selling Expenses	$7,400	$11,900	$8,700	$28,000
- Administrative Expenses	$3,800	$5,400	$4,300	$13,500
- Land	$4,700			$4,700
- Dividends			$1,200	$1,200
- Interest on borrowings			$550	$550
Total Cash disbursements	$54,600	$51,500	$43,700	$149,800
Net Cash surplus	-$9,680	$5,420	$24,120	$5,120
Borrowings	$17,000	$2,000		$19,000
(Repayments)	$0	$0	-$17,000	-$17,000
Ending Cash balance	$7,320	$7,420	$7,120	$7,120