Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2508987 • 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: a. Budgeted monthly absorption costing income statements for April-July are: Sales Cost of goods sold April May June July $ 520.000 $ 670,000 $ 210,000 $ 320,000 364,000 469,000 147,000 224,000 Gross margin 156,000 201,000 63,000 96,000 Selling and administrative expenses: Selling expense Administrative expense* 72,000 41,000 122,000 69,600 26,000 23,200 32,000 30,000 Total selling and administrative expenses 113,000 191,600 49,200 62,000 Net operating income $ 43,000 $ 9,400 $ 13,800 $ 34,000 *Includes $13,000 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; 80% collected in the first month following the month of sale; and the remaining 10% collected in the second month following the month of sale. February's sales totaled $110,000, and March's sales totaled $300,000. 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 $120,400. 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 $72.800. f. Dividends of $22,000 will be declared and paid in April. g. Land costing $30,000 will be purchased for cash in May. 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.Explanation / Answer
Solution:
Part 1 -- Schedule of Expected Cash Collection
Schedule of Expected Cash Collections
April
May
June
Quarter
Cash Sales (Total Sales x 20%)
$104,000
$134,000
$42,000
$280,000
Credit Sales:
February Sales (110,000*80% credit sale)
$8,800
$8,800
March Sales (300,000*80% credit sale)
$192,000
$24,000
$216,000
April Sales
$41,600
$332,800
$41,600
$416,000
May Sales
$53,600
$428,800
$482,400
June Sales
$16,800
$16,800
Total Cash Collections
$242,400
$410,400
$487,200
$1,140,000
Part 2(a) - Merchandise Purchase Budget
Merchandise Purchases Budget
April
May
June
July
Budgeted cost of goods sold
364000
469000
147000
$224,000
Plus: Desired Ending Inventory (20% of Budgeted Cost of Goods Sold of next month)
93800
29400
44800
Total needs
457800
498400
191800
Less: Beginning balance of inventory (Ending balance of last month)
72800
93800
29400
Required inventory purchases
385000
404600
162400
Part 2(b) - Schedule of Expected Cash Disbursements
Schedule of Expected Cash Disbursements
July
August
September
Quarter
Beginning Accounts Payable
$120,400
$120,400
July Purchases
$192,500
$202,300
$394,800
August Purchases
$202,300
$81,200
$283,500
September Purchases
$81,200
$81,200
Total Cash disbursements
$312,900
$404,600
$162,400
$879,900
Part 3 – Cash Budget
Cash Budget
For the Quarter Ended June 30
April
May
June
Quarter
Beginning Cash Balance
$44,000
$40,500
($151,300)
$44,000
Add: Collection from Customers (Refer Part 1)
$242,400
$410,400
$487,200
$1,140,000
Total Available Cash
$286,400
$450,900
$335,900
$1,184,000
Less: Cash Disbursements
Purchase for Inventory (Part 2a)
$312,900
$404,600
$162,400
$879,900
Selling Expense
$72,000
$122,000
$26,000
$220,000
Admin Expense (excluding depreciation)
$28,000
$56,600
$10,200
$94,800
Land Purchase
$30,000
$30,000
Dividend Paid
22000
$22,000
Total Cash Disbursements
$434,900
$613,200
$198,600
$1,246,700
Excess (Deficiency) of available cash over cash disbursements
($148,500)
($162,300)
$137,300
($62,700)
Financing:
$0
Borrowings
$189,000
$11,000
$200,000
Repayment
($96,337)
($96,337)
Interest
($963)
($963)
Total Financing
$189,000
$11,000
($97,300)
$102,700
Ending Cash Balance
$40,500
($151,300)
$40,000
$40,000
Schedule of Expected Cash Collections
April
May
June
Quarter
Cash Sales (Total Sales x 20%)
$104,000
$134,000
$42,000
$280,000
Credit Sales:
February Sales (110,000*80% credit sale)
$8,800
$8,800
March Sales (300,000*80% credit sale)
$192,000
$24,000
$216,000
April Sales
$41,600
$332,800
$41,600
$416,000
May Sales
$53,600
$428,800
$482,400
June Sales
$16,800
$16,800
Total Cash Collections
$242,400
$410,400
$487,200
$1,140,000
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