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	$	780,000	$	880,000	$	315,000	$	550,000
Cost of goods sold		546,000		616,000		220,500		385,000
Gross margin		234,000		264,000		94,500		165,000
Selling and administrative expenses:
Selling expense		94,000		123,000		36,500		55,000
Administrative expense*		52,000		95,800		35,800		52,000
Total selling and administrative expenses		146,000		218,800		72,300		107,000
Net operating income	$	88,000	$	45,200	$	22,200	$	58,000

*Includes $23,500 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; 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 $215,000, and March’s sales totaled $315,000.
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 $142,800.
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 $109,200.
f.	Dividends of $43,000 will be declared and paid in April.
g.	Land costing $51,000 will be purchased for cash in May.
h.	The cash balance at March 31 is $65,000; 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
Schedule of expected cash collections for April, May, and June, and for the quarter in total
	April	May	June	Quarter
Cash Sales	$156,000	$176,000	$63,000	$395,000
Credit sale Collection
- February Sales	$34,400			$34,400
- March Sales	$176,400	$50,400		$226,800
- April Sales	$62,400	$436,800	$124,800	$624,000
- May Sales		$70,400	$492,800	$563,200
- June Sales			$25,200	$25,200
Expected Cash Collection	$429,200	$733,600	$705,800	$1,868,600
Answer 2a
A merchandise purchases budget for April, May, and June.
	April	May	June	Quarter
Cost of goods sold	$546,000	$616,000	$220,500	$1,382,500
Add : Ending Inventory	$123,200	$44,100	$77,000	$77,000
Less : Beginning Inventory	$109,200	$123,200	$44,100	$109,200
Merchandise Purchases	$560,000	$536,900	$253,400	$1,350,300
Answer 2b
A schedule of expected cash disbursements for merchandise purchases
	April	May	June	Quarter
Accounts Payable at March 31	$142,800			$142,800
April Purchases	$280,000	$280,000		$560,000
May Purchases		$268,450	$268,450	$536,900
June Purchases			$126,700	$126,700
Expected Cash Disbursements	$422,800	$548,450	$395,150	$1,366,400
Answer 3
Cash Budget
	April	May	June	Quarter
Cash collection from Sales	$429,200	$733,600	$705,800	$1,868,600
Total Cash Receipts	$429,200	$733,600	$705,800	$1,868,600
Cash disbursements
- Merchandise Purchases	$422,800	$548,450	$395,150	$1,366,400
- Dividends	$43,000			$43,000
- Purchase of Land		$51,000		$51,000
- Selling Expenses	$94,000	$123,000	$36,500	$253,500
- Administrative Expenses	$28,500	$72,300	$12,300	$113,100
Total Cash disbursements	$588,300	$794,750	$443,950	$1,827,000
Cash Surplus / (Deficit)	-$159,100	-$61,150	$261,850	$41,600
Add : Beginning Cash balance	$65,000	$40,900	$40,750	$65,000
Total Cash Available	-$94,100	-$20,250	$302,600	$106,600
Add : Borrowing	$135,000	$61,000	$0	$196,000
Less : Loan repayment	$0	$0	-$196,000	-$196,000
Less : Interest Payment	$0	$0	-$5,270	-$5,270
Ending Cash balance	$40,900	$40,750	$101,330	$101,330