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 $ 720,000 $ 890,000 $ 600,000 $500,000 504,000 623,000 420,000 350,000 216,000 267,000 180,000 150,000 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expense Administrative expense* Total selling and administrative expenses Net operating income 90,000 50,000 140,000 $ 76,000 109,000 71,000 68,000 44,000 177,000 115,000 $90,000 $ 65,000 50,000 48,000 98,000 $ 52,000 "Includes $32,000 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 $280,000, and March's sales totaled $295,000. 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 $133,000. 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 $100,800. f. Dividends of $39,000 will be declared and paid in April. g. Land costing $47,000 will be purchased for cash in May. h. The cash balance at March 31 is $61,000; the company must maintain a cash balance of at least $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.

Answer 1

Answer to Requirement 1. Expected Cash Collections April 144000 May 178000 June 120000 Quarter 442000 Cash Sales Sales on account: February March 44800 165200 57600 April 47200 403200 71200 44800 212400 576000 569600 48000 1892800 115200 498400 48000 781600 May June Total Cash Collections 411600 699600 Answer to Requirement 2A. July 000 350000 Budgeted Cost of Goods Sold Add: Desired Ending Inventory Total Needs Less: Beginning Inventory Required Inventory Purchases Inventory Purchases Budget April 504000 124600 628600 100800 527800 May 623000 84000 707000 124600 582400 June 420000 70000 490000 84000 406000 Answer to Requirement 2B. May June Accounts Payable, March 31 April Purchases May Purchases June Purchases Total Cash Disbursements Schedule of Expected Cash Disbursements in Inventory April 133000 263900 263900 291200 Quarter 133000 527800 582400 203000 1446200 291200 203000 494200 396900 555100

May 40700 699600 740300 June 40200 781600 821800 Quarter 61000 1892800 1953800 Answer to Requirement 3. Garden Sales, Inc. Cash Budget For the Quarter Ended June 30 April Beginning Cash Balance 61000 Add: Collections from Customers 411600 Total Cash Available 472600 Less: Cash Disbursements: Purchases for Inventory 396900 Selling Expenses 90000 Administrative Expenses 18000 Land Purchases Dividend Paid 39000 Total Cash Disbursements 543900 Excess (Deficiency) of Cash available over disbursements -71300 Financing: Borrowings 112000 Repayments Interest Total Financing 112000 Ending Cash Balance 40700 555100 109000 36000 47000 494200 71000 12000 0 1446200 270000 66000 47000 39000 1868200 85600 747100 -6800 577200 244600 47000 - 159000 4300 159000 -159000 4300 4300 81300 47000 40200 -163300 81300 Interest = ($112,000 * 1% *3) + ($47,000 * 1% * 2) = $4,300