Garden Sales, Inc., sells garden supplies. Management is planning its cash needs

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:

   

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 $150,000, and March’s sales totaled $210,000.

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 $89,600.

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 $61,600.

h. The cash balance at March 31 is $44,000; 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:

  

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 $61,600 and accounts payable for inventory purchases at March 31 remains $89,600.

  

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.

        

Using the president’s new assumptions in (2) above, prepare the following for merchandise inventory:

   

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

         

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

         

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.)

     

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

Explanation / Answer

(1) Schedule of Expected Cash Collections

Therefore, Schedule of Expected Cash Collections for current quarter:

Tutor's Note: Please see following Excel formulas for above, for your benefit.

NOTE: The first question is answered.

SALES BUDGET SCHEDULE February March April May June July Total Sales ($) 1,50,000 2,10,000 4,40,000 9,70,000 4,20,000 3,20,000 Cash Sales: 20% ($) 30,000 42,000 88,000 1,94,000 84,000 64,000 Credit Sales: 80% ($) 1,20,000 1,68,000 3,52,000 7,76,000 3,36,000 2,56,000 CASH COLLECTION SCHEDULE February March April May June July Cash Collected: 10% of Credit Sales of current month ($) (1) 12,000 16,800 Cash Collected: 70% of Credit Sales of previous month ($) (2) 84,000 1,17,600 Cash Collected: 20% of Credit Sales of 2nd previous month ($) (3) 24,000 33,600 Cash Collected: 25% of Credit Sales of current month ($) (4) 88,000 1,94,000 84,000 64,000 Cash Collected: 65% of Credit Sales of previous month ($) (5) 2,28,800 5,04,400 2,18,400 Cash Collected: 10% of Credit Sales of 2nd previous month ($) (6) 35,200 77,600 ADD: Cash Collected: Cash Sales of current month ($) (7) 30,000 42,000 88,000 1,94,000 84,000 64,000 Total Cash Collected ($) (1) + (2) + (3) 42,000 1,42,800 3,17,600 6,50,400 7,07,600 4,24,000

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