Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2552562 • 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 $33,000 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 $285,000, and March’s sales totaled $300,000.
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 $129,500.
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 $91,000.
Dividends of $40,000 will be declared and paid in April.
Land costing $48,000 will be purchased for cash in May.
The cash balance at March 31 is $62,000; 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
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 $91,000 and accounts payable for inventory purchases at March 31 remains $129,500.
Required:
1. 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.
2. Using the president’s new assumptions in (2) above, 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. Using the president’s new assumptions, prepare a cash budget for April, May, and June, and
for the quarter in total.
Explanation / Answer
Solution:
Part 1 – Schedule of Expected Cash Collections
Schedule of Expected Cash Collection
April
May
June
Quarter
Cash Sales (20% of Sales)
$130,000
$230,000
$122,000
Sales on Account
February
$45,600
March
$168,000
$48,000
April
$130,000
$338,000
$52,000
May
$230,000
$598,000
June
$122,000
Total Cash Collections
$473,600
$846,000
$894,000
$2,213,600
Collection of Feb and March Credit Sale are collected as the percentage mentioned in main section --- it is assumed that main section is the above percentage collection mentioned in the question.
Part 2(a) --- Merchandise Purchase Budget
Merchandise Purchase Budget
April
May
June
Quarter
Cost of Goods Sold (given)
$455,000
805000
$427,000
Add: desired ending inventory (15% of next months COGS)
$120,750
$64,050
$54,600*
Total needs
$575,750
$869,050
$481,600
Less: Beginning Inventory (Ending inventory of last month)
$91,000
(March ending inventory)
$120,750
$64,050
Required Inventory purchases
$484,750
$748,300
$417,550
$1,650,600
*Ending Inventory of June = COGS OF July $364,000* 15% = 54,600
Part 2(b) -- schedule of expected cash disbursements for merchandise purchases for April, May, and June and for the quarter in total.
Expected Cash Disbursement - Merchandise Purchase
April
May
June
Quarter
Beginning Accounts Payable
$129,500
April Purchases
$242,375
$242,375
May Purchases
$374,150
$374,150
June Purchases
$208,775
Total Cash disbursements
$371,875
$616,525
$582,925
$1,571,325
Part 3 – Cash Budget
Cash Budget
April
May
June
Quarter
Beginning cash balance
$62,000
$40,350
$40,250
$62,000
Add: Cash collections (Refer part 1)
$473,600
$846,000
$894,000
$2,213,600
Total cash available
$535,600
$886,350
$934,250
$2,275,600
Less: Cash disbursements
Purchases for Inventory
$484,750
$748,300
$417,550
$1,650,600
Selling Expense
$121,000
$110,000
$72,000
$303,000
Administrative Expense (excluding depreciation since it is a non cash item)
$17,500
$35,800
$11,600
$64,900
Land Purchase
$0
$48,000
$0
$48,000
Dividends paid
$40,000
$0
$40,000
Total Cash disbursements
$663,250
$942,100
$501,150
$2,106,500
Excess (deficiency) of cash available over disbursements
-$127,650
-$55,750
$433,100
$169,100
Financing
Borrowings
$168,000
$96,000
$264,000
Repayments
-$264,000
-$264,000
Interest (Refer calculation below)
-$6,960
-$6,960
Total Finiancing
$168,000
$96,000
-$270,960
-$6,960
Ending Cash Balance
$40,350
$40,250
$162,140
$162,140
Interest = (168,000*1%*3) + (96,000*1%*2) = 5040 + 1920 = $6,960
Note --- Since the limit of loan upto $200,000 but it the question the cash in May month is negative we need to take loan upto $96,000 to make it positive balance.
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Schedule of Expected Cash Collection
April
May
June
Quarter
Cash Sales (20% of Sales)
$130,000
$230,000
$122,000
Sales on Account
February
$45,600
March
$168,000
$48,000
April
$130,000
$338,000
$52,000
May
$230,000
$598,000
June
$122,000
Total Cash Collections
$473,600
$846,000
$894,000
$2,213,600
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