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: May July April $450,000 315.000 135,0DD $980 DDD 6.86.000 294.DDD June $430,000 301.000 129.000 $330.000 231.000 99.000 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expense Administrative expense" Total selling and administrative expenses Net operating income 87.000 41.500 128.500 6,500 93.000 55.200 148.200 $ 145 BDO 54.000 33.800 87.800 $ 41.200 33,000 31,000 64.000 35.000 $ $ *Includes $15,000 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 $155,000, and March's sales totaled $215,000. 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 $91,700. 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 $63,000. f. Dividends of $23,000 will be declared and paid in April. g. Land costing $31,000 will be purchased for cash in May. h. The cash balance at March 31 is S45,000; 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. 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 591,700. Required: 1. Using the president's new assumptions in (1) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total.

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%

ASSUMPTIONS 2

Calculation April May June June 301,000 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 May 315,000 686,000 102,900 45,150 417,900 731,150 63,000 102,900 354,900 628,250 Quarter 1,302,000 34,650 1,336,650 63,000 1,273,650 335,650 45,150 290,500 End Inv of Apr End Inv of May June April May June Schedule of expected cash discursements-Purchases Req 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 =354,900*50% Quarter 91,700 354,900 628,250 145,250 1,220,100 =354,900*50% =628,250*50% 314,125 145,250 459,375 =628,250*50% =290,500*50%