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	$	600,000	$	900,000	$	500,000	$	400,000
Cost of goods sold		420,000		630,000		350,000		280,000
Gross margin		180,000		270,000		150,000		120,000
Selling and administrative expenses:
Selling expense		79,000		120,000		62,000		51,000
Administrative expense*		45,000		52,000		41,000		38,000
Total selling and administrative expenses		124,000		172,000		103,000		89,000
Net operating income	$	56,000	$	98,000	$	47,000	$	31,000

*Includes $20,000 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 $200,000, and March’s sales totaled $300,000.
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 $126,000.
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 $84,000.
f.	Dividends of $49,000 will be declared and paid in April.
g.	Land costing $16,000 will be purchased for cash in May.
h.	The cash balance at March 31 is $52,000; 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.

Garden Sales, Inc. Cash Budget For the Quarter Ended June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Purchases for inventory Selling expenses Administrative expenses Land purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayment Interest Total financing Ending cash balance

Answer 1

1)			Schedule of Expected cash collection
			April	May	June	Quarter
Cash sales			120000	180000	100000	400000
Sales on account
February	(200000*80%*20%)		32000			32000
March	(300000*80%*70%;20%)		168000	48000		216000
April	(480000*10%;70%;20%)		48000	336000	96000	480000
May	(720000*10%;70%)			72000	504000	576000
June	(400000*10%)				40000	40000
Total cash collections			368000	636000	740000	1744000
2)		Merchandise purchase budget
			April	May	June
Budgeted cost of goods sold			420,000	630,000	350,000
Add: ending inventory			126000	70000	56000
Total needs			546,000	700,000	406,000
less:Beginning inventory			84,000	126,000	70,000
Required inventory purchases			462,000	574,000	336,000
b)	Schedule of Expected Cash Disbursements for Merchandise purchase
			April	May	June	Quarter
Beginning accounts payable			126,000			126,000
April purchases			231000	231000		462000
May purchases				287000	287000	574000
June purchases					168000	168000
total cash disbursements			357,000	518000	455000	1,330,000
3)			Cash budget
				April	May	June	Quarter
Beginning cash balance				52,000	40,000	40,000	52,000
Add collections from customers				368000	636000	740000	1744000
total cash available				420,000	676000	780000	1796000
less cash Disbursements
purchase of inventory				357,000	518000	455000	1,330,000
selling expenses				79,000	120,000	62,000	261,000
administrative expenses				25000	32000	21000	78000
land purchases				0	16,000	0	16000
dividends paid				49,000	0	0	49,000
total cash disbursements				510,000	686000	538000	1,734,000
Excess(Deficiency)of cash available				-90,000	-10000	242000	62,000
Financing
Borrowing				130,000	50,000	0	180,000
Repayment				0	0	-180000	-180000
interest				0	0	-4,900	-4900
total financing				130,000	50,000	-184900	-4,900
ending cash balance				40,000	40,000	57100	57,100
		interest = 130000*1%*3			3900
			50000*1%*2		1000
					4900