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: Sales Cost of goods sold Gross margin Selling and administrative expenses Selling expense Administrative expense Total selling and administrative expenses Net operating income April May June July $530,000 $1,050,000 $ 510,000 $ 410,000 371,000 735,000 357.000 287,000 159,000 315,000 153,000 123,000 101,000 100,000 61,000 41,000 45,500 60,800 38,000 39,000 146,500 160, 800 99,000 80,000 $ 12,500 $ 154,200 $ 54,000 $ 43,000 25 "Includes $23,000 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 $220,000, and March's sales totaled $250,000. 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 $107,100 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 $30,000 will be declared and paid in April g. Land costing $38,000 will be purchased for cash in May. h. The cash balance at March 31 is $52,000; the company must maintah 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 for expected cash collection
	Details	April	May	June	Quarter
	Cash Sales	106000	210000	102000	418000
	Sales on accounts
	Feburary (220000*80%*10%)	17600			17600
	March (250000*80%*65%,10%)	130000	20000		150000
	April (530000*80%25%,65%%,10%)	106000	275600	42400	424000
	May (1050000*80%25%,65%)		210000	546000	756000
	June (510000*80%25%)			102000	102000
	Total cash collection	359600	715600	792400	1867600
2)	Merchandise Inventory
	Particular	April	May	June
	Budgeted cost of goods sold	371000	735000	357000
	Add:ending inventory	110250	53550	43050
	Total needs	481250	788550	400050
	Less: Beginning inventory	74200	110250	53550
	Required inventory purchases	407050	678300	346500

2)b)	Schedule of Expected Cash Disbursements for merchandise purchase
	Details	April	May	June	Quarter
	Beginning accounts payable	107100			107100
	April purchases	203525	203525		407050
	May purchases		339150	339150	678300
	June purchases			173250	173250
	total cash disbursements	310625	542675	512400	1365700

3)	Cash Budget
	Details	April	May	June	Quarter
	Beginning cash balance	52000	40475	40600	133075
	Add collections from customers	359600	715600	792400	1867600
	Total Cash available	411600	756075	833000	1919600
	less cash Disbursements
	purchase of inventory	310625	542675	512400	1365700
	selling expenses	101000	100000	61000	41000
	administrative expenses	22500	37800	15000	75300
	land purchases		38000		38000
	dividends paid	30000			30000
	total cash disbursements	464125	718475	588400	1771000
	Excess(deficieny)of cash avaiable	-52525	37600	244600	148600
	Financing
	Borrowing	93000	3000		96000
	Repayment			96000	96000
	interest			2940	2940
	total financing	40475	40600	145660	145660
	calculation of interest
	96000*1%*3 = 2880
	3000*1%*2= 60
	total = 2940