Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2425439 • Letter: G
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:
Budgeted monthly absorption costing income statements for April–July are:
April
May
June
July
Sales
$610,000
$1,110,000
$570,000
$470,000
Cost of Goods Sold
427,000
777,000
399,000
329,000
Gross Margin
183,000
333,000
171,000
141,000
Selling & Admin. Exp
Selling Exp
113,000
106,000
68,000
47,000
Admin Exp. *
48,500
65,600
42,200
45,000
Total Selling & Admin Exp.
161,500
171,600
110,200
92,000
Net operating income
$21,500
$161,400
$60,800
$49,000
*Includes $29,000 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 $265,000, and March’s sales totaled $280,000.
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 $121,100.
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 $85,400.
f) Dividends of $36,000 will be declared and paid in April.
g) Land costing $44,000 will be purchased for cash in May.
h) The cash balance at March 31 is $58,000; the company must maintain a cash balance of atleast $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.
The company’s president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revises the cash collection and ending inventory assumptions as follows:
1) Sales continue to be 20% for cash and 80% on credit. However, credit sales from April, May, and June are collected over a three-month period with 25% collected in the month of sale, 65% collected in the month following sale, and 10% in the second month following sale. Credit sales from February and March are collected during the second quarter using the collection percentages specified in the main section.
2) The company maintains its ending inventory levels for April, May, and June at 15% of the cost of merchandise to be sold in the following month. The merchandise inventory at March 31 remains $64,050 and accounts payable for inventory purchases at March 31 remains $121,100.
Required:
1) Using the president’s new assumptions in (1) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total.
2) Using the president’s new assumptions in (2) above, 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.
3) Using the president’s new assumptions, prepare a cash budget for April, May, and June, and
for the quarter in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
April
May
June
July
Sales
$610,000
$1,110,000
$570,000
$470,000
Cost of Goods Sold
427,000
777,000
399,000
329,000
Gross Margin
183,000
333,000
171,000
141,000
Selling & Admin. Exp
Selling Exp
113,000
106,000
68,000
47,000
Admin Exp. *
48,500
65,600
42,200
45,000
Total Selling & Admin Exp.
161,500
171,600
110,200
92,000
Net operating income
$21,500
$161,400
$60,800
$49,000
Explanation / Answer
Details
April
May
June
Quarter
Sales
$ 610,000
$ 1,110,000
$ 570,000
Cash
$ 122,000
$ 222,000
$ 114,000
Credit sales
$ 488,000
$ 888,000
$ 456,000
Cash collections:
April
$ 122,000
$ 317,200
$ 48,800
May
$ -
$ 222,000
$ 577,200
June
$ -
$ -
$ 114,000
Total collections
$ 244,000
$ 761,200
$ 854,000
$ 1,859,200
Details
April
May
June
Cost of goods sold (a)
$ 427,000
$ 777,000
$ 399,000
Ending inventory (b)
$ 116,550
$ 59,850
$ 49,350
Beginning inventory (c )
$ 64,050
$ 116,550
$ 59,850
Purchase (d) = (a) +(b)-(c )
$ 479,500
$ 720,300
$ 388,500
Details
April
May
June
Purchase
$ 479,500
$ 720,300
$ 388,500
Disbursements:
For the month @ 50%
$ 239,750
$ 360,150
$ 194,250
Payment for previous month @50%
$ 121,100
$ 239,750
$ 360,150
Total disbursements
$ 360,850
$ 599,900
$ 554,400
Details
April
May
June
Quarter total
Beginning balance:
$ 58,000
$ 40,000
$ 40,000
Revenues:
Total collections
$ 244,000
$ 761,200
$ 854,000
$ 1,859,200
Loan taken
$ 267,350
$ 25,300
$ -
$ 1,859,200
Total Collections
$ 569,350
$ 826,500
$ 894,000
$ 3,718,400
Expenses:
Purchases disbursements
$ 360,850
$ 599,900
$ 554,400
$ 1,515,150
Selling expenses
$ 113,000
$ 106,000
$ 68,000
$ 287,000
Admin expenses
(Exclude depreciation)
$ 19,500
$ 36,600
$ 13,200
$ 69,300
Dividends paid
$ 36,000
$ -
$ -
$ 36,000
Land purchase
$ -
$ 44,000
$ -
$ 44,000
Interest and principle repayment
$ 218,400
$ 218,400
Total expenses
$ 529,350
$ 786,500
$ 854,000
$ 2,169,850
Ending cash balance
$ 40,000
$ 40,000
$ 40,000
Details
April
May
June
Quarter
Sales
$ 610,000
$ 1,110,000
$ 570,000
Cash
$ 122,000
$ 222,000
$ 114,000
Credit sales
$ 488,000
$ 888,000
$ 456,000
Cash collections:
April
$ 122,000
$ 317,200
$ 48,800
May
$ -
$ 222,000
$ 577,200
June
$ -
$ -
$ 114,000
Total collections
$ 244,000
$ 761,200
$ 854,000
$ 1,859,200
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