Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2510817 • 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:
*Includes $29,000 of depreciation each month.
Sales are 20% for cash and 80% on account.
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.
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 $126,700.
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 $96,600.
Dividends of $36,000 will be declared and paid in April.
Land costing $44,000 will be purchased for cash in May.
The cash balance at March 31 is $58,000; the company must maintain a cash balance of at least $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.
Required:
1. Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total.
2. 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. Prepare a cash budget for April, May, and June as well as in total for the quarter. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
April May June July Sales $ 690,000 $ 860,000 $ 570,000 $ 470,000 Cost of goods sold 483,000 602,000 399,000 329,000 Gross margin 207,000 258,000 171,000 141,000 Selling and administrative expenses: Selling expense 87,000 106,000 68,000 47,000 Administrative expense* 48,500 65,600 42,200 45,000 Total selling and administrative expenses 135,500 171,600 110,200 92,000 Net operating income $ 71,500 $ 86,400 $ 60,800 $ 49,000Explanation / Answer
Cash Receipts Budget April May June Totals Sales 690000 860000 570000 2120000 80% of the sales are on credit 552000 688000 456000 1696000 Cash sales 138000 172000 114000 424000 Cash Collections: In the month of sales 55200 68800 45600 169600 1 Month Prior 156800 386400 481600 1024800 2 Months Prior 42400 44800 110400 197600 Total Collections 254400 500000 637600 1392000 Purchases Budget April May June Totals Cost of Goods Sold 483000 602000 399000 1484000 Desired Ending Inventory 120400 79800 65800 Total Needs 603400 681800 464800 1750000 Beginning Inventory 96600 120400 79800 Total Purchases 506800 561400 385000 1453200 Cash Disbursements April May June Totals Purchases 506800 561400 385000 1453200 Payments for Purchases: Current Month 253400 280700 192500 726600 1 Month Prior 126700 253400 280700 660800 Total 380100 534100 473200 1387400 Cash Budget April May June Totals Cash Receipts Cash sales 138000 172000 114000 424000 Collection from customers 254400 500000 637600 1392000 Total cash receipts 392400 672000 751600 1816000 Cash Disbursements Payment for purchases 380100 534100 473200 1387400 Selling expense 87000 106000 68000 261000 Cash Administrative expenses 19500 36600 13200 69300 Dividends 36000 36000 land purchase 44000 44000 Total disbursements 522600 720700 554400 1797700 Excess/(Deficiency) -130200 -48700 197200 18300 of Cash Beginning Balance 58000 11800 10100 58000 Borrowing/(Repayments) on Line of Credit 84000 47000 -131000 0 Interest paid -3460 -3460 Ending Cash Balance 11800 10100 72840 72840
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