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:

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

	April		May		June		July
Sales	$	540,000	$	740,000	$	440,000	$	340,000
Cost of goods sold		378,000		518,000		308,000		238,000
Gross margin		162,000		222,000		132,000		102,000
Selling and administrative expenses:
Selling expense		74,000		94,000		55,000		34,000
Administrative expense*		42,000		56,000		34,400		32,000
Total selling and administrative expenses		116,000		150,000		89,400		66,000
Net operating income	$	46,000	$	72,000	$	42,600	$	36,000

*Includes $16,000 of depreciation each month.

2. Sales are 20% for cash and 80% on account.

3. 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 $160,000, and March’s sales totaled $220,000.

4. 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 $99,400.

5. 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 $75,600.

6. Dividends of $24,000 will be declared and paid in April.

7. Land costing $32,000 will be purchased for cash in May.

8. The cash balance at March 31 is $46,000; the company must maintain a cash balance of at least $40,000 at the end of each month.

9. 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.	Schedule of Expected Cash Collections
		April	May	June	Quarter
	Cash sales	108000	148000	88000	344000
	Sales on account:
	February	12800			12800
	March	140800	17600		158400
	April	43200	345600	43200	432000
	May		59200	473600	532800
	June			35200	35200
	Total cash collections	304800	570400	640000	1515200
2a.	Merchandise Purchases Budget
		April	May	June
	Cost of goods sold	378000	518000	308000
	Add: Desired ending inventory	103600	61600	47600
	Total needs	481600	579600	355600
	Less: Beginning inventory	75600	103600	61600
	Required inventory purchases	406000	476000	294000
2b.	Schedule of Expected Cash Disbursements for Merchandise Purchases
		April	May	June	Quarter
	March accounts payable	99400			99400
	April purchases	203000	203000		406000
	May purchases		238000	238000	476000
	June purchases			147000	147000
	Total cash disbursements	302400	441000	385000	1128400

3.	Garden Sales Inc.
	Cash Budget
	For the Quarter Ended June 30
		April	May	June	Quarter
	Beginning cash balance	46000	40400	40800	46000
	Add collections from customers	304800	570400	640000	1515200
	Total cash available	350800	610800	680800	1561200
	Less cash disbursements:
	Purchases for inventory	302400	441000	385000	1128400
	Selling expenses	74000	94000	55000	223000
	Administrative expenses	26000	40000	18400	84400
	Land purchases		32000		32000
	Dividends paid	24000			24000
	Total cash disbursements	426400	607000	458400	1491800
	Excess (deficiency) of cash available over disbursements	-75600	3800	222400	69400
	Financing:
	Borrowings	116000	37000		153000
	Repayment			-153000	-153000
	Interest			-4220	-4220
	Total financing	116000	37000	-157220	-4220
	Ending cash balance	40400	40800	65180	65180

Interest = ($116000 x 1% x 3) + ($37000 x 1% x 2) = $3480 + $740 = $4220