Question

Managrial accounting

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: October July $40, 000 August $70, 000 42, 000 September $50, 000 30, 000 $45, 000 Sales Cost of goods sold 24, 000 27, 000 Gross margin 20, 000 18, 000 16, 000 28, 000 Selling and administrative expenses: Selling expense Administrative expense* 7, 200 11, 700 8, 500 6, 100 7, 300 5, 900 5, 600 7, 200 Total expenses 12, 800 13, 200 18, 900 14, 600 3, 200 5, 400 9, 100 4, 800 Operating income 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

Cash Budget
	July	August	September	Quarter
Opening Balance	$               8,000	$                8,000	$              8,000	$                8,000
Cash Collection	$             36,160	$              47,760	$            59,600	$            143,520
Cash available	$             44,160	$              55,760	$            67,600	$            151,520
Less: Payments
Inventory purchases	$             30,450	$              35,250	$            30,375	$              96,075
Selling Expenses	$                7,200	$              11,700	$              8,500	$              27,400
Administrative Expenses	$               3,600	$                5,200	$              4,100	$              12,900
Land	$                4,500			$                4,500
Dividend			$              1,000	$                1,000
Total Disbursements	$             45,750	$              52,150	$            43,975	$            141,875
Payments minus receipts
Excess /(Deficiency)	$             (1,590)	$                3,610	$            23,625	$                9,645
Financing Activity
Borrowings	$                9,495	$                 4,252	$                     -	$              13,747
Repayment			$           (13,747)	$             (13,747)
Interest	$                     95	$                    138	$          (137)	$                      96
Total Financing	$                9,590	$                 4,390	$           (13884)	$                  (96)
Ending Balance	$               8,000	$                8,000	$              9,741	$                9,741

Working:

Borrowings for July = x

-1590+0.01x +x = 8000

1.01x = 9590

x = 9495

Borrowings for July = $9495

Interest = 9495 *1% = 95

Borrowing for August = x

3610+0.01x+x+95 = 8000

1.01x = 4295

x = 4252

Borrowings for August = $4252

Interest = 4252 * 1% + 4295 *1% = 138