Question

Scott Products Inc. is a merchandising company that sells binders, paper, and other school supplies. The company is planning its cash needs for the third quarter. In the past, Scott Products has had to borrow money during the third quarter to support peak sales of back- to-school materials, which occur during August. The following information has been assembled to assist in preparing a cash budget for the quarter: a. Budgeted monthly absorption costing income statements for for July through October are as follows: Sales Cost of goods sold July $40,000 24,000 August $70,000 42,000 September $50,000 30,000 October $45,000 27,000 Gross margin 16,000 28,000 20,000 18,000 Selling and administrative expenses: Selling expense Administrative expense* 7,200 5,600 11,700 7,200 8,500 6,100 7,300 5,900 Total expenses 12,800 18,900 14,600 13,200 Operating income $ 3,200 $ 9, 100 $ 5,400 $ 4,800 * Includes $2,000 depreciation each month. b. Sales are 20% for cash and 80% on credit. C. Credit sales are collected over a three-month period, with 10% collected in the month of sale, 70% in the month following sale, and 20% in the second month following sale. May sales totalled $30,000, and June sales totalled $36,000. 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 for inventory purchases at June 30 total $11,700. e. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $18,000. f. Land costing $4,500 will be purchased in July. g. Dividends of $1,000 will be declared and paid in September. h. The cash balance on June 30 is $8,000; the company must maintain a cash balance of at least this amount at the end of each month. i. The company has an agreement with a local bank that allows the company to borrow up to a total loan balance of $40,000. The interest rate on these loans is 1% per month. All borrowing is done at the beginning of a month. The company would, as far as it is able, repay the loan at the end of each month. Interest must be paid at the end of each month based on the outstanding loans for that month. There are no loans outstanding as at June 30.

Answer 1

July $40,000 August $70,000 September $50,000 Quarter $160,000 Budgeted Sales (value) July $8,000 August $14,000 September $10,000 Quarter $32,000 Collection on sales Cash Sales - 20% of Total sales Sales on account May (30000*80%*20%) June (36000*80%*70%) & (36000*80%*20%) July August September Total Cash collections $4,800 $20,160 $3,200 $5,7601 $22,400 $5,600 $6,400 $39,200 $4,000 $59,600 $4,800 $25,920 $32,000 $44,800 $4,000 $143,520 $36,160 $47,760 a Merchandise Purchase Budget July Budgeted Cost of Goods sold Add : Desired Ending Inventory Total Needs Less: Expected Beginning Inventory Required Inventory purchase $24,000 $31,500 $55,500 $18,000 $37,500 August $42,000 $22,500 $64,500 $31,500 $33,000 September $30,000 $20,250 $50,250 $22,500 $27,750 Quarter $96,000 $20,250 $116,250 $18,000 $98,250 September closing inventory = October COGS * 75% = $27,000*75% August September b Expected Cash disbursements for Materials Purchases and expenses July Accounts payable June 30 $11,700 July purchases $18,750 August purchases September purchases Total cash payments $30,450 $18,750 $16,500 Quarter $11,700 $37,500 $33,000 $13,875 $96,075 $16,500 $13,8751 $30,375 $35,250 3 Quarter $8,000 $143,520 $151,520 Scott Products Inc. Cash Budget For the Quarter ended September 30 July August September Cash balance, beginning $8,000 $8,000 $8,000 Add: collections from sales $36,160 $47,760 $59,600 Total cash available $44,160 $55,760 $67,600 Les disbursements: For inventory purchase $30,450 $35,250 $30,375 For selling expense $7,200 $11,700 $8,500 For administrative expense $3,600 $5,200 $4,100 For land $4,500 For dividend $1,000 Total disbursements $45,750 $52,150 $43,975 Excess (deficiency) of cash available over disbursements $1,590 $3,610 $23,625 Financing Borrowings $9,687 $4,434 Repayment -$14,121 Interest -$97 -$44 -$141 Total financing $9,590 $4,390 $14,262 Cash Balance, ending $8,000 $8,000 $9,363 $96,075 $27,400 $12,900 $4,500 $1,000 $141,875 $9,645 $14, 121 -$14,121 -$282 -$282 $9,363