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 $ 740,000 $ 920,000 $ 620,000 $ 530,000 Cost of goods sold 518,000 644,000 434,000 371,000 Gross margin 222,000 276,000 186,000 159,000 Selling and administrative expenses: Selling expense 92,000 111,000 73,000 53,000 Administrative expense* 51,000 69,600 45,200 50,000 Total selling and administrative expenses 143,000 180,600 118,200 103,000 Net operating income $ 79,000 $ 95,400 $ 67,800 $ 56,000 *Includes $34,000 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 $290,000, and March’s sales totaled $305,000. 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 $137,200. 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 $103,600. Dividends of $41,000 will be declared and paid in April. Land costing $49,000 will be purchased for cash in May. The cash balance at March 31 is $63,000; 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

Cash Budget
For the Quarter ending June 30
	April	May	June	Quarter
Opening Balance	63000	40600	40200	63000
Collections	424400	720800	807200	1952400
Cash Available	487400	761400	847400	2015400
Payments:
Purchases	408800	572600	511700	1493100
Selling expense	92000	111000	73000	276000
Admin Expense	17000	35600	11200	63800
Dividends	41000			41000
Land		49000		49000
Total Payments	558800	768200	595900	1922900
Excess cash over payments	-71400	-6800	251500	92500
Financing
Borrowing	112000	47000		159000
Repayment			-159000	-159000
Interest Expense			-4300	-4300
Total	112000	47000	-163300	-4300
Cash Balance	40600	40200	88200	88200
112000 * 0.03 = 3360 ; 47000 * 0.02 = 940