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 $ 710,000 497,000 213,000 May $ 880,000 616,000 264,000 June July $ 590,000 $ 490,000 413,000 343,000 177,000 147,000 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expense Administrative expense* Total selling and administrative expenses Net operating income 89,000 108,000 49,500 67,200 138,500 175, 200 $ 74,500 $ 88,800 70,000 49,000 43,400 47,000 113,400 96,000 $ 63,600 $ 51,000 *Includes $31,000 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 $275,000, and March's sales totaled $290,000. 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 $130,900. 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 $99,400. f. Dividends of $38,000 will be declared and paid in April. g. Land costing $46,000 will be purchased for cash in May. h. The cash balance at March 31 is $60,000; 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

a Schedule of expected Cash Collection April May June Quarter $ 142,000 $ 176,000 $ 118,000 $ 436,000 $ Cash Sales Sales on Account February March April |May June Total Cash Collection $ 44,000 $ 162,400 $ 46,400 $ 56,800 $ 397,600 $ 70,400 $ $ $ 405,200 $ 690,400 $ $ 44,000 $ 208,800 113,600 $ 568,000 492,800 $ 563,200 47,200 $ 47,200 771,600 $ 1,867,200 Note: Sales Cash Sales Sales on Account February March April May $ 275,000 $ 290,000 $ 710,000 $ $ 55,000 $ 58,000 $ 142,000 $ $ 220,000 $ 232,000 $ 568,000 $ June 880,000 $ 590,000 176,000 $ 118,000 704,000 $ 472,000 b Cost of Goods Sold Add: Ending Merchandise Total Needs Less: Beginning Merchandise Required Inventory Purchase Merchandise Purchase Budget April May June Quarter $ 497,000 $ 616,000 $ 413,000 $ 1,526,000 $ 123,200 $ 82,600 $ 68,600 $ 68,600 $ 620,200 $ 698,600 $ 481,600 $ 1,594,600 $ 99,400 $ 123,200 $ 82,600 $ 99,400 $ 520,800 $ 575,400 $ 399,000 $ 1,495,200

Beginning Accounts Payable April Purchases May Purchases June Purchases Total Cash Disbursement Merchandise Purchase Budget April May June Quarter $ 65,450 $ 65,450 (130900*50%) $ 260,400 $ 260,400 $ 520,800 $ 287,700 $ 287,700 $ 575,400 199,500 $ 199,500 $ 325,850 $ 548,100 $ 487,200 $ 1,361,150 $

$ $ Garden Sales Inc Cash Budget For the quarter ended June 30 April May June Quarter Beginning Cash Balance $ 60,000 $ 40,850 $ 40,950 $ 60,000 Add: Collection from customers $ 405,200 $ 690,400 $ 771,600 $ 1,867,200 Total Cash Available $ 465,200 $ 731,250 $ 812,550 $ 1,927,200 Less: Cash Disbursements: Purchase of Inventory 325,850 $ 548,100 $ 487,200 $ 1,361,150 Selling Expenses $ 89,000 $ 108,000 $ 70,000 $ 267,000 Administrative Expenses 18,500 $ 36,200 $ 12,400 $ 67,100 Land Purchase $ $ 46,000 $ $ 46,000 Dividend Paid 38,000 $ $ $ 38,000 Total Cash Disbursements $ 471,350 $ 738,300 $ 569,600 $ 1,779,250 Excess (Deficiency) of Cash Available over disbursement $ (6,150) $ (7,050) $ 242,950 $ 147,950 Financing Borrowings $ 47,000 $ 48,000 $ 95,000 Repayments $ (95,000) $ (95,000) Interest $ (2,370) $ (2,370) Total Financing $ 47,000 $ 48,000 $ (97,370) $ (2,370) Ending Cash Balance 40,850 $ 40,950 $ 145,580 $ 145,580 $ $

Depreciation is excluded from Selling since it is non cash in nature. it does not involve any cash flow.

Note:

Calculation of Borrowings Deficiency End balance requirement Total Cash needs Borrowing (multiples of 1000) April $ $ $ $ May 6,150 $ 40,000 $ 46,150 $ 47,000 $ 7,050 40,000 47,050 48,000 May 47,000 $ 48,000 calculation of interest April Borrowings $ No. months for which interest is payable Interest Rate Interest $ 3 2 Borrowed at the beginning of month 1% 1% 1,410 $ 960