Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2529047 • 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 $12,000 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; 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 $140,000, and March’s sales totaled $200,000.
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 $91,000.
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 $70,000.
Dividends of $20,000 will be declared and paid in April.
Land costing $28,000 will be purchased for cash in May.
The cash balance at March 31 is $42,000; 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.
1) Prepare a schedule of expected cash collections for April, May, June, and the quarter in total.
April May June July Sales $ 500,000 $ 700,000 $ 400,000 $ 300,000 Cost of goods sold 350,000 490,000 280,000 210,000 Gross margin 150,000 210,000 120,000 90,000 Selling and administrative expenses: Selling expense 70,000 90,000 51,000 30,000 Administrative expense* 40,000 52,800 32,000 28,000 Total selling and administrative expenses 110,000 142,800 83,000 58,000 Net operating income $ 40,000 $ 67,200 $ 37,000 $ 32,000 April May June Quarter Cash sales Sales on account February March May June Total cash collectionsS 2. Prepare the following for merchandise inventory: a. A merchandise purchases budget for April, May, and June Merchandise Purchases Budget April May June Budgeted cost of goods sold Total needs Required inventory purchases b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total. Schedule of Expected Cash Disbursements for Merchandise Purchases April May June Quarter Beginning accounts payable April purchases May purchases June purcnases Total cash disbursements SExplanation / Answer
Solution:
Part 1 – Expected Cash Collection Schedule
April
May
June
Quarter
Cash Sales (20% of total sales)
$100,000
$140,000
$80,000
Sales on account:
February Sales
$14,000
March Sales
$160,000
$20,000
April Sales
$50,000
$400,000
$50,000
May Sales
$70,000
$560,000
June Sales
$40,000
Total Cash Collections
$324,000
$630,000
$730,000
$1,684,000
Part 2a --- Merchandise Purchase Budget
Merchandise Purchased Budget
April
May
June
Budgeted Cost of Goods Sold
$350,000
$490,000
$280,000
Plus: Desired Finished Goods Ending Inventory
(20% of next month's COGS)
$98,000
$56,000
$42,000
Total Needs
$448,000
$546,000
$322,000
Less Beginning Finished Goods Inventory
(Ending inventory of last month)
$70,000
$98,000
$56,000
Required Inventory purchases
$378,000
$448,000
$266,000
Part 2b – Schedule of Expected Cash Disbursements for Merchandise Purchases
Expected Cash disbursement for purchases of materials
April
May
June
Beginning accounts payable
$91,000
April Purchases
$189,000
$189,000
May Purchases
$224,000
$224,000
June Purchases
$133,000
Total cash disbursements
$280,000
$413,000
$357,000
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April
May
June
Quarter
Cash Sales (20% of total sales)
$100,000
$140,000
$80,000
Sales on account:
February Sales
$14,000
March Sales
$160,000
$20,000
April Sales
$50,000
$400,000
$50,000
May Sales
$70,000
$560,000
June Sales
$40,000
Total Cash Collections
$324,000
$630,000
$730,000
$1,684,000
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