Question

Scott Products Inc. is a merchandising company that sells binders, paper, and other school supplies. The company is planning its cash needs for the third quarter. In the past, Scott Products has had to borrow money during the third quarter to support peak sales of back- to-school materials, which occur during August. The following information has been assembled to assist in preparing a cash budget for the quarter: a. Budgeted monthly absorption costing income statements for for July through October are as follows: Sales Cost of goods sold July $40,000 24,000 August $70,000 42,000 September $50,000 30,000 October $45,000 27,000 Gross margin 16,000 28,000 20,000 18,000 Selling and administrative expenses: Selling expense Administrative expense* 7,200 5, 600 11, 700 7, 200 8,500 6, 100 7, 300 5, 900 Tot al expenses 12, 800 18,900 1 4, 600 13,200 Operating income $ 3,200 $ 9, 100 $ 5,400 $ 4,800 * Includes $2,000 depreciation each month. b. Sales are 20% for cash and 80% on credit. c. Credit sales are collected over a three-month period, with 10% collected in the month of sale, 70% in the month following sale, and 20% in the second month following sale. May sales totalled $30,000, and June sales totalled $36,000. 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 for inventory purchases at June 30 total $11,700. e. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $18,000. f. Land costing $4,500 will be purchased in July g. Dividends of $1,000 will be declared and paid in September h. The cash balance on June 30 is $8,000; the company must maintain a cash balance of at least this amount at the end of each month. i. The company has an agreement with a local bank that allows the company to borrow up to a total loan balance of $40,000. The interest rate on these loans is 1% per month. All borrowing is done at the beginning of a month. The company would, as far as it is able, repay the loan at the end of each month. Interest must be paid at the end of each month based on the outstanding loans for that month. There are no loans outstanding as at June 30.

Answer 1

1) Schedule of expected Cash collections September 14,000 $ July $ August 8,000 $ Quarter 10,000 $ Cash Sales 32,000 Sales on account: May 4,800 4,800 June 5,760 20,160 25,920 July 22,400 6,400 3,200 32,000 5,600 44,800 August 39,200 September 4,000 4,000 59,600 $ 36,160 $ $ Total cash collections 47,760 143,520 Working Notes Мay July September June August Sales (A) 30,000 36,000 40,000 70,000 14,000 50,000 Cash Sales (A x 20%) X 6,000 7,200 8,000 10,000 Credit Sales [B (Ax 80%)] 40,000 24,000 28,800 32,000 56,000 Collection of Credit Sale in Three Instalment Collected in Same month (Bx 10%) Collected in month following the sale (Bx 70%) Collected in second month following sale (Bx 20%) 2,880 2,400 16,800 3,200 5,600 4,000 28,000 20,160 22,400 39,200 6,400 4,800 5,760 11,200 8,000 X

2-a Merchandise Purhcase Budget July September August Budgeted Cost of goods sold Add: Desired Ending Inventory 30,000 24,000 42,000 20,250 31,500 22,500 Total Needs 64,500 50,250 55,500 Less: Estimated Beginning Inventory 18,000 31,500 22,500 Required Inventory Purchases 37,500 33,000 27,750 Working Notes: October July August September 30,000 Cost of goods sold Ending Inventory 24,000 42,000 27,000 31,500 22,500 20,250 (42,000 x 75%) (30,000 x 75%) (27,000 x 75%) 2-b Schedule of expected Cash Disbursement Schedule September July August Quarter Accounts payable June 30 11,700 11,700 37,500 July Purchases (37,500/2) August Purchases (33,000/2) September purchases (27,750/2) 18,750 18,750 16,500 16,500 33,000 30,375 13,875 Total 30,375 30,450 35,250 112,575

3) Cash Budget Cash Budget July September Quarter August Beginning Cash Balance 8,000 8,000 8,000 8,000 Collection from sales 36,160 47,760 59,600 143,520 Total Cash Available to spend (A) 44,160 55,760 67,600 151,520 Less: Disbursement For Inventory purchases For Selling expense For Administrative expense 30,450 35,250 30,375 96,075 7,200 8,500 11,700 27,400 3,600 5,200 4,100 12,900 For Land 4,500 4,500 For Dividends 1,000 1,000 Total Cash Disbursement (B) 45,750 52,150 43,975 141,875 Excess (deficiency) of cash available over disbursement [C -A-B] (1,590) 3,610 23,625 9,645 Financing 9,590 Borrowings 4,390 13,980 (13,980) (13,980) Repayments (376) (376) Interest (376) Total Financing [D] 4,390 (14,356) 9,590 Ending Cash Balance [C+D] 9,270 8,000 8,000 9,270

Calculation of Interest repayment Amount Borrowed on 1st July 9,590 1% P.m Rate of interest Total Interest for quarter (9,590 x 1% x 3) 288 Amount Borrowed on 1st August 4,390 19% P.m Rate of interest Total Interest for quarter (4,390 x 1% x 2) 88 Total Interest (288+88) 376 Calculation of Administrative expenses July September August 7,200 6,100 Expenses Less: Depreciation 5,600 (2,000) (2,000) (2,000) Payment of Administrative expense 3,600 5,200 4,100