Question

Problem 8-24 Cash Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8]

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	$	680,000	$	850,000	$	560,000	$	460,000
Cost of goods sold		476,000		595,000		392,000		322,000
Gross margin		204,000		255,000		168,000		138,000
Selling and administrative expenses:
Selling expense		86,000		105,000		67,000		46,000
Administrative expense*		48,000		64,800		41,600		44,000
Total selling and administrative expenses		134,000		169,800		108,600		90,000
Net operating income	$	70,000	$	85,200	$	59,400	$	48,000

*Includes $28,000 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 $260,000, and March’s sales totaled $275,000.

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 $124,600.

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 $95,200.

6. Dividends of $35,000 will be declared and paid in April.

7. Land costing $43,000 will be purchased for cash in May.

8. The cash balance at March 31 is $57,000; 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.

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.

Answer 1

Part 1

	April	May	June	Quarter
Cash sales (680000*20%) (850000*20%) (560000*20%)	136000	170000	112000	418000
Sales on account:
February sales (260000*80%*20%)	41600			41600
March sales (275000*80%*70%); (275000*80%*20%)	154000	44000		198000
April sales (680000*80%*10%); (680000*80%*70%); (680000*80%*30%)	54400	380800	163200	598400
May sales (850000*80%*10%); (850000*80%*70%)		68000	476000	544000
June sales (560000*80%*10%)			44800	44800
Total cash collections	386000	662800	796000	1844800

Part 2

Merchandise purchases budget

	April	May	June	july
Budgeted cost of goods sold	476000	595000	392000	322000
Add: desired ending inventory (595000*20%); (392000*20%); (322000*20%)	119000	78400	64400
Total needs	595000	673400	456400
Less: beginning inventory	95200	119000	78400
Required inventory purchases	499800	554400	378000

Schedule of expected cash disbursements for merchandise purchases:

	April	May	June	Quarter
Accounts payable, march 31	124600			137200
April purchases (499800*50%)	249900	249900		499800
May purchases (554400*50%)		277200	277200	554400
June purchases (378000*50%)			189000	189000
Total cash disbursements	374500	527100	466200	1380400

	April	May	June	Quarter
Cash balance, beginning	57000	40500	40400	57000
Add: collections from sales	386000	662800	796000	1844800
Total cash available	443000	703300	836400	1901800
Less: cash disbursements
Purchase of inventory	374500	527100	466200	1380400
Selling expenses	86000	105000	67000	258000
Administrative expenses (48000-28000); (64800-28000); (41600-28000)	20000	36800	13600	70400
Land purchases		43000		43000
Dividend paid	35000			35000
Total disbursements	515500	711900	546800	1786800
Excess (deficiency) of cash	(72500)	(8600)	289600	115000
Financing:
Borrowings	113000	49000		162000
Repayments	0	0	(162000)	(162000)
Interest (113000*1%*3)+ (49000*1%*2)	0	0	(4370)	(4370)
Total financing	113000	49000	(166370)	(4370)
Cash balance, ending	40500	40400	123230	110630