Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2426187 • 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:
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 $155,000, and March’s sales totaled $215,000.
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 $91,700.
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 $63,000.
The cash balance at March 31 is $45,000; the company must maintain a cash balance of atleast $40,000 at the end of each month.
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:
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.
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 $47,250 and accounts payable for inventory purchases at March 31 remains $91,700.
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:
Explanation / Answer
Garden sales, Inc.,
Cash budget for the quarter ended June 30
Particulars April May June Total
Cash at begining 45000 40000 46645 131645
cash collected from customers 325200 660400 717600 1703200
Total cash available 370200 700400 764245 1834845
Less cash disbursements :
Purchases for inventory 269150 491575 459375 1220100
selling expences 87000 93000 54000 234000
Administrative expences 26500 40200 18800 85500
Land purchased 0 31000 0 31000
Dividend paid 23000 0 0 23000
total cash disbursements 405650 655775 532175 1593600
excess of cash available (35450) 44645 232070 241245
Financing:
Borrowings 1000 2000
Repayments 3030
Interest 30
Total financing 1000 2000
Ending cash balance (35450) 46645 229040 240235
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