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 pealk 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 June July Sales Cost of goods sold Gross margin Selling and administrative expenses $650,000 820,000 $530,000 $ 430,000 455,000 574,000 246,000 371,000 159,000 301,000 Selling expense Administrative expense* Total selling and administrative expenses Net operating income 83,000 46,500 102,000 62,400 164,400 64,000 39,200 103,200 43,000 41,000 84,000 45,000 $65,500 81,600 55,800 Includes $25,000 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 $245,000, and March's sales totaled $260,000 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 $118,300 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 $91,000 f Dividends of $32,000 will be declared and paid in April. g. Land costing $40,000 will be purchased for cash in May h. The cash balance at March 31 is $54,000; 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

	1)			Schedule of Expected cash collection
				April	May	June	Quarter
	Cash sales			130000	164000	106000	400000
	Sales on account
	February	(245000*80%*20%)		39200			39200
	March	(260000*80%*70%;20%)		145600	41600		187200
	April	(520000*10%;70%;20%)		52000	364000	104000	520000
	May	(656000*10%;70%)			65600	459200	524800
	June	(424000*10%)				42400	42400
	Total cash collections			366800	635200	711600	1713600
	2)		Merchandise purchase budget
				April	May	June
	Budgeted cost of goods sold			455,000	574,000	371,000
	Add: ending inventory			114800	74200	60200
	Total needs			569,800	648,200	431,200
	less:Beginning inventory			91,000	114,800	74,200
	Required inventory purchases			478,800	533,400	357,000
	b)	Schedule of Expected Cash Disbursements for Merchandise purchase
				April	May	June	Quarter
	Beginning accounts payable			118,300			118,300
	April purchases			239400	239400		478800
	May purchases				266700	266700	533400
	June purchases					178500	178500
	total cash disbursements			357,700	506100	445200	1,309,000
	3)			Cash budget
					April	May	June	Quarter
	Beginning cash balance				54,000	40,600	40,300	54,000
	Add collections from customers				366800	635200	711600	1713600
	total cash available				420,800	675800	751900	1767600
	less cash Disbursements
	purchase of inventory				357,700	506100	445200	1,309,000
	selling expenses				83,000	102,000	64,000	249,000
	administrative expenses				21500	37400	14200	73100
	land purchases				0	40,000	0	40000
	dividends paid				32,000	0	0	32,000
	total cash disbursements				494,200	685500	523400	1,703,100
	Excess(Deficiency)of cash available				-73,400	-9700	228500	64,500
	Financing
	Borrowing				114,000	50,000	0	164,000
	Repayment				0	0	-164000	-164000
	interest				0	0	-4,420	-4420
	total financing				114,000	50,000	-168420	-4,420
	ending cash balance				40,600	40,300	60080	60,080
			interest = 114000*1%*3			3420
				50000*1%*2		1000
						4420