Question

Required 1, 2a, and 2b are correct. However, I am having issues trying to figure out the rest of 3. Explanations on how you found the numbers for 3 will be great so I have a better understanding of why and how.

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:

1. Budgeted monthly absorption costing income statements for April–July are:

	April		May		June		July
Sales	$	700,000	$	870,000	$	580,000	$	480,000
Cost of goods sold		490,000		609,000		406,000		336,000
Gross margin		210,000		261,000		174,000		144,000
Selling and administrative expenses:
Selling expense		88,000		107,000		69,000		48,000
Administrative expense*		49,000		66,400		42,800		46,000
Total selling and administrative expenses		137,000		173,400		111,800		94,000
Net operating income	$	73,000	$	87,600	$	62,200	$	50,000

*Includes $30,000 of depreciation each month.

2. Sales are 20% for cash and 80% on account.

3. 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 $270,000, and March’s sales totaled $285,000.

4. 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 $128,800.

5. 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 $98,000.

6. Dividends of $37,000 will be declared and paid in April.

7. Land costing $45,000 will be purchased for cash in May.

8. The cash balance at March 31 is $59,000; the company must maintain a cash balance of at least $40,000 at the end of each month.

9. 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.

Required:

1. Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total.

	Schedule of Expected Cash Collections April May June Quarter Cash sales $140,000 $174,000 $116,000 $430,000 Sales on account: February 43,200 0 0 43,200 March 159,600 45,600 0 205,200 April 56,000 392,000 112,000 560,000 May 0 69,600 487,200 556,800 June 0 0 46,400 46,400 Total cash collections $398,800 $681,200 $761,600 $1,841,600

2. Prepare the following for merchandise inventory:

a. A merchandise purchases budget for April, May, and June.

b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total.

	Merchandise Purchases Budget April May June Budgeted cost of goods sold $490,000 $609,000 $406,000 Add: Desired ending merchandise inventory 121,800 81,200 67,200 Total needs 611,800 690,200 473,200 Less: Beginning merchandise inventory 98,000 121,800 81,200 Required inventory purchases $513,800 $568,400 $392,000

	Schedule of Expected Cash Disbursements for Merchandise Purchases April May June Quarter Beginning accounts payable $128,800 $0 $0 $128,800 April purchases 256,900 256,900 0 513,800 May purchases 0 284,200 284,200 568,400 June purchases 0 0 196,000 196,000 Total cash disbursements $385,700 $541,100 $480,200 $1,407,000

3. Prepare a cash budget for April, May, and June as well as in total for the quarter

Garden Sales, Inc. Cash Budget For the Quarter Ended June 30 April May June Quarter Beginning cash balance $59,000 Add collections from customers 398,800 681,200 761,600 1,841,600 Total cash available 457,800 681,200 761,600 1,841,600 Less cash disbursements: Purchases for inventory Selling expenses 88,000 107,000 69,000 264,000 Administrative expenses Land purchases 0 45,000 0 45,000 Dividends paid 37,000 0 0 37,000 Total cash disbursements 125,000 152,000 69,000 346,000 Excess (deficiency) of cash available over disbursements 332,800 529,200 692,600 1,495,600 Financing: Borrowings Repayment Interest Total financing 0 0 0 0 Ending cash balance $332,800 $529,200 $692,600 $1,495,600

Answer 1