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 $ 530,000 $ 730,000 $ 430,000 $ 330,000 371,000 511,000 301,000 231,000 159,000 219,000 129,000 9 9,000 Sales Cost of goods sold Gross margin Selling and administrative expenses : Selling expense Administrative expense* Total selling and administrative expenses Net operating income 73,000 41,500 114,500 $ 44,500 93,000 54,000 55,200 33,800 148,200 87,800 $ 70,800 $ 41,200 33,000 3 1,000 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; 80% collected in the first month following the month of sale; and the remaining 10% 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 $97,300. 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 $74,200. f. Dividends of $23,000 will be declared and paid in April.

Answer 1

Answer to Requirement 1. Expected Cash Collections April 106000 May 146000 June 86000 Quarter 338000 Cash Sales Sales on account: February March April May June Total Cash Collections 12400 137600 42400 17200 339 200 58400 42400 467200 34400 630000 12400 154800 424000 525600 34400 1489 200 298400 560800 Answer to Requirement 2A. July 231000 Budgeted Cost of Goods Sold Add: Desired Ending Inventory Total Needs Less: Beginning Inventory Required Inventory Purchases Inventory Purchases Budget April 371000 102200 473200 74200 399000 May 511000 60200 571200 102200 469000 June 301000 46200 347200 60200 287000 Answer to Requirement 2B. June Accounts Payable, March 31 April Purchases May Purchases June Purchases Total Cash Disbursements Schedule of Expected Cash Disbursements in Inventory April May 74200 199500 199500 234500 Quarter 74200 399000 469000 143500 1085 700 234500 143500 378000 273700 434000

May 40200 560800 601000 June 40800 630000 670800 Quarter 45000 1489200 1534200 Answer to Requirement 3. Garden Sales, Inc. Cash Budget For the Quarter Ended June 30 April Beginning Cash Balance 45000 Add: Collections from Customers 298400 Total Cash Available 343400 Less: Cash Disbursements: Purchases for Inventory 273700 Selling Expenses 73000 Administrative Expenses 26500 Land Purchases Dividend Paid 23000 Total Cash Disbursements 396200 Excess (Deficiency) of Cash available over disbursements -52800 Financing: Borrowings 93000 Repayments Interest Total Financing 93000 Ending Cash Balance 40200 434000 93000 40200 31000 378000 54000 18800 0 1085 700 220000 85500 31000 23000 1445 200 89000 598200 2800 450800 220000 38000 -131000 -3550 -134550 85450 131000 -131000 -3550 -3550 85450 38000 40800 L Interest = ($93,000 * 1% * 3) + ($38,000 * 1% * 2) = $3,550