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 $670,000 $840,000$550,000$450,000 Cost of goods sold 469,000 588,000 385,000 315,000 Gross margin 201,000 252,000 165,000 135,000

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 $122,500.
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 $93,800.
f.	Dividends of $34,000 will be declared and paid in April.
g.	Land costing $42,000 will be purchased for cash in May.
h.	The cash balance at March 31 is $56,000; 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

	Apr	May	June	Quarter
Sales Budgeted	670000	840000	550000	2060000
1.Sales Collections
Cash sales(20%)	134000	168000	110000	412000
Feb sales(255000*80%*20%)	40800			40800
Mar sales(270000*80%*70%)	151200			151200
Mar sales(270000*80%*20%)		43200		43200
Apr.670000*10%;70%;20%)	53600	375200	107200	536000
May sales(840000*80%*10%;70%)		67200	470400	537600
June sales(550000*80%*10%)			44000	44000
Total sales collections	379600	653600	731600	1764800

2 a. Merchandise purchases budget
					July
Cost of goods sold	469000	588000	385000	1442000	315000
Add: Desired End.Inv.(20%*nxt.mth COGS)	117600	77000	63000	63000
Total needed	586600	665000	448000	1505000
Less: Avail.in Beg.inv.	93800	117600	77000	93800
Purchases needed	492800	547400	371000	1411200

b.Schedule of expected cash disbursements for merchandise purchases
Purchases of:
Mar.	122500			122500
Apr.	246400	246400		492800
May		273700	273700	547400
June			185500	185500
Total cash disbursements for merch.pur.	368900	520100	459200	1348200

3.Cash Budget	Apr	May	June	Quarter
Beg.balance	56000	40200	40700	56000
Total sales collections	379600	653600	731600	1764800
Total cash available	435600	693800	772300	1820800
Disbursements:
for merch.purch.	368900	520100	459200	1348200
Selling expenses	85000	104000	66000	255000
Cash admn.exp.	20500	37000	13400	70900
Dividends	34000			34000
Purchase of land		42000		42000
Total Disbursements	508400	703100	538600	1750100
Surplus/(Deficit)	-72800	-9300	233700	70700
Add: Borrowings	113000	50000		163000
Less: Repayments			-163000	-163000
Less: Int.on borrowings			-4390	-4390
Ending balance	40200	40700	66310	66310
Interest =
(113000*1%*3)+(50000*1%*2)= 4390