Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2567839 • 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 $32,000 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 $280,000, and March’s sales totaled $295,000.
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 $133,000.
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 $100,800.
Dividends of $39,000 will be declared and paid in April.
Land costing $47,000 will be purchased for cash in May.
The cash balance at March 31 is $61,000; 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.
April May June July Sales $ 720,000 $ 890,000 $ 600,000 $ 500,000 Cost of goods sold 504,000 623,000 420,000 350,000 Gross margin 216,000 267,000 180,000 150,000 Selling and administrative expenses: Selling expense 90,000 109,000 71,000 50,000 Administrative expense* 50,000 68,000 44,000 48,000 Total selling and administrative expenses 140,000 177,000 115,000 98,000 Net operating income $ 76,000 $ 90,000 $ 65,000 $ 52,000Explanation / Answer
1 Sales budget April May June Quarter Sales 720000 890000 600000 2210000 Cash sales 144000 178000 120000 442000 Credit sales 576000 712000 480000 1768000 2 Budgeted Cash receipt April May June Quarter Cash sales 144000 178000 120000 442000 February sales 44800 44800 March sales 165200 47200 212400 April Sales 57600 403200 115200 576000 May sales 71200 498400 569600 June sales 48000 48000 Total collection 411600 699600 781600 1892800 3 Purchase budget April May June Next month sales 623000 420000 350000 Ending inventory 20% 124600 84000 70000 Add Sales 504000 623000 420000 Less Beginning inventory 100800 124600 84000 Required purchase 527800 582400 406000 4 Particulars April May June Quarter Accounts payable 133000 133000 Payment for April 263900 263900 527800 Payment for May 291200 291200 582400 Payment for June 203000 203000 Total payments 396900 555100 494200 1446200 Cash budget April May June Quarter Beginning cash balance 61,000 40,700 40,200 61,000 Add Cash collections 411600 699600 781600 1892800 Total collections 4,72,600 7,40,300 8,21,800 19,53,800 Less Cash disbursements Payment of material 396900 555100 494200 1446200 Selling expense 90000 109000 71000 270000 Administrative expense 18000 36000 12000 66000 Land purchased 47000 47000 Dividend paid 39000 39000 Total payments 543900 747100 577200 1868200 cash balance -71,300 -6,800 2,44,600 85,600 Financing Loan taken 112000 47000 159000 Loan repaid 159000 159000 Interest paid 4770 4770 Ending cash balance 40,700 40,200 80,830 80,830
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