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	$	450,000	$	980,000	$	430,000	$	330,000
Cost of goods sold		315,000		686,000		301,000		231,000
Gross margin		135,000		294,000		129,000		99,000
Selling and administrative expenses:
Selling expense		87,000		93,000		54,000		33,000
Administrative expense*		41,500		55,200		33,800		31,000
Total selling and administrative expenses		128,500		148,200		87,800		64,000
Net operating income	$	6,500	$	145,800	$	41,200	$	35,000

*Includes $15,000 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; 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 $155,000, and March’s sales totaled $215,000.

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 $91,700.

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 $63,000.

6. Dividends of $23,000 will be declared and paid in April.

7. Land costing $31,000 will be purchased for cash in May.

8. The cash balance at March 31 is $45,000; 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

The company’s president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revises the cash collection and ending inventory assumptions as follows:

1. Sales continue to be 20% for cash and 80% on credit. However, credit sales from April, May, and June are collected over a three-month period with 25% collected in the month of sale, 65% collected in the month following sale, and 10% in the second month following sale. Credit sales from February and March are collected during the second quarter using the collection percentages specified in the main section.

2. The company maintains its ending inventory levels for April, May, and June at 15% of the cost of merchandise to be sold in the following month. The merchandise inventory at March 31 remains $63,000 and accounts payable for inventory purchases at March 31 remains $91,700.

Required:

1. Using the president’s new assumptions in (a) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total.

2. Using the president’s new assumptions in (b) above, 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. Using the president’s new assumptions, prepare a cash budget for April, May, and June, and
for the quarter in total.

Schedule of Expected Cash Collections April May June Quarter Cash sales $90,000 $196,000 $86,000 $372,000 Sales on account: February 24,800 24,800 March 120,400 34,400 154,800 April 90,000 234,000 36,000 360,000 May 78,400 98,000 176,400 June 0 Total cash collections $325,200 $542,800 $220,000 $1,088,000

Merchandise Purchases Budget April May June Total needs 0 0 0 Required inventory purchases $0 $0 $0

Schedule of Expected Cash Disbursements for Merchandise Purchases April May June Quarter $0 April purchases 0 May purchases 0 June purchases 0 Total cash disbursements $0 $0 $0 $0

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 0 0 0 0 Less cash disbursements: Purchases for inventory Selling expenses Administrative expenses Land purchases Dividends paid Total cash disbursements 0 0 0 0 Excess (deficiency) of cash available over disbursements 0 0 0 0 Financing: Borrowings Repayment Interest Total financing 0 0 0 0 Ending cash balance $0 $0 $0 $0

Answer 1

Calculation April May June June 430,000 Quarter 1,860,000 86,000 372,000 =450,000*20% =980,000*20% -430,000*20% Garden Sales Inc ASSUMPTIONS A Schedule of expected cash collections Req 1 April May Sales 450,000 980,000 Cash collections Cash sales 90,000 196,000 Sales on account Feb 24,800 Mar 120,400 34,400 April 36,000 252,000 May 78,400 June Total cash collections 271,200 560,800 24,800 154,800 =155,000*80%*20% =215,000*80%*70% -450,000*80%*10% =215,000*80%*20% -450,000*80%*70% =980,000*80%*10% 72,000 548,800 34,400 741,200 627,200 34,400 1,573,200 -450,000*80%*20% =980,000*80%*70% -430,000*80%*10% April May June Inventory Purchase budget Req 2a Budgeted Cost of goods sold Add Desired Ending Inventory Total Needs Less Beginning Inventory Required Purchases =686,000*20% =301,000*20% =231,000*20% April 315,000 1 37,200 452,200 63,000 389,200 May 686,000 60,200 746,200 137,200 609,000 June 301,000 46,200 347,200 60,200 287,000 Quarter 1,302,000 46,200 1,348,200 63,000 1,285,200 End Inv of Apr End Inv of May June April May June Schedule of expected cash discursements-Purchases Reg 2b April May Accounts Payable 91,700 Apr Purchases 194,600 194,600 May Purchases 304,500 June Purchases Total cash disbursements 286,300 499,100 =389,200*50% Quarter 91,700 389,200 609,000 143,500 1,233,400 =389,200*50% =609,000*50% 304,500 143,500 448,000 =609,000*50% =287,000*50% April May June April 45,000 271,200 316,200 May 40,400 560,800 601,200 June Quarter (12,100) 45,000 741,200 1,573,200 729,100 1,618,200 286,300 87,000 26,500 499, 100 93,000 43,200 31,000 448,000 54,000 21,800 -41,500-15,000 Cash budget Req3 Cash balance, beginning Add Cash collections Total cash available Less cash disbursements Purchase of Inventory Selling expenses Administrative expenses Land purchases Dividends paid Total Cash disbursements Excess (deficiency) of cash Financing Borrowings Repayments Interest Total financing Cash balance, ending =55,200-15,000 1,233,400 234,000 91,500 31,000 23,000 1,612,900 5,300 23,000 422,800 (106,600) 666,300 (65,100) 523,800 205,300 147,000 53,000 200,000 =107,000+40,000 =200,000-147,000 (160,000) Round off deficit 106, 600 to 107,000 (4,670) Max loan is 200,000 35,330 40,630 (160,000) (4,670) (164,670) 40,630 =147,000+13,000 =(145,000*1%*3)+(13,000*1%*2) 147,000 40,400 53,000 (12,100)

Calculation April May June June 430,000 Quarter 1,860,000 86,000 372,000 =450,000*20% =980,000*20% -430,000*20% Garden Sales Inc ASSUMPTIONS B Schedule of expected cash collections Req 1 April May Sales 450,000 980,000 Cash collections Cash sales 90,000 196,000 Sales on account Feb 24,800 Mar 120,400 34,400 April 90,000 234,000 May 196,000 June Total cash collections 325,200 660,400 =155,000*80%*20% =215,000*80%*70% -450,000*80%*25% 24,800 154,800 360,000 705,600 86,000 1,703,200 = 215,000*80%*20% -450,000*80%*65% =980,000*80%*25% 36,000 509,600 86,000 717,600 -450,000*80% 10% =980,000*80%*65% -430,000*80%*25% April May June Inventory Purchase budget Req 2a Budgeted Cost of goods sold Add Desired Ending Inventory Total Needs Less Beginning Inventory Required Purchases =686,000*15% =301,000*15% =231,000*15% April 315,000 102,900 417,900 63,000 354,900 May 686,000 45,150 731,150 102,900 628,250 June 301,000 34,650 335,650 45,150 290,500 Quarter 1,302,000 34,650 1,336,650 63,000 1,273,650 End Inv of Apr End Inv of May June May June Schedule of expected cash discursements-Purchases Reg 2b April May Accounts Payable 91,700 Apr Purchases 177,450 177,450 May Purchases 314,125 June Purchases Total cash disbursements 269,150 491,575 Quarter April 91,700 354,900 =354,900*50% 628,250 145,250 1,220,100 =354,900*50% =628,250*50% 314,125 145,250 459,375 =628,250*50% =290,500*50% April May June April 45,000 325,200 370,200 May 40,550 660,400 700,950 June 42,175 717,600 759,775 Quarter 45,000 1,703,200 1,748,200 269,150 87,000 26,500 459,375 54,000 21,800 1,220,100 234,000 491,575 93,000 43,200 31,000 -41,500-15,000 =55,200-15,000 Cash budget Req3 Cash balance, beginning Add Cash collections Total cash available Less cash disbursements Purchase of Inventory Selling expenses Administrative expenses Land purchases Dividends paid Total Cash disbursements Excess (deficiency) of cash Financing Borrowings Repayments Interest Total financing Cash balance, ending =33,800-15,000 23,000 405,650 (35,450) 31,000 23,000 1,599,600 148,600 658,775 42,175 535,175 224,600 76,000 76,000 =36,000+40,000 (76,000) Round off deficit 35,450 to 36,000 (2,280) (2,280) 146,320 (76,000) (2,280) (78,280) 146,320 =76,000*1%*3 76,000 40,550 42,175