Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2579637 • 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: April May June July Sales $ 540,000 $ 740,000 $ 440,000 $ 340,000 Cost of goods sold 378,000 518,000 308,000 238,000 Gross margin 162,000 222,000 132,000 102,000 Selling and administrative expenses: Selling expense 74,000 94,000 55,000 34,000 Administrative expense* 42,000 56,000 34,400 32,000 Total selling and administrative expenses 116,000 150,000 89,400 66,000 Net operating income $ 46,000 $ 72,000 $ 42,600 $ 36,000 *Includes $16,000 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 $160,000, and March’s sales totaled $220,000. 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 $99,400. 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 $75,600. f. Dividends of $24,000 will be declared and paid in April. g. Land costing $32,000 will be purchased for cash in May. h. The cash balance at March 31 is $46,000; 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. 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.)
Explanation / Answer
Answer to Part 1
Schedule of Expected Cash Collections
April
May
June
Quarter
Cash sales
$108,000
$148,000
$88,000
$344,000
Sales on account:
February
12,800
12,800
March
140,800
17,600
158,400
April
43,200
345,600
43,200
432,000
May
59,200
473,600
532,800
June
35,200
35,200
Total cash collections
$304,800
$570,400
$640,000
$1,515,200
Answer to Part 2
Merchandise Purchases Budget
April
May
June
Budgeted cost of goods sold
$378,000
$518,000
$308,000
ADD: Desired ending merchandise inventory
103,600
61,600
47,600
Total needs
481,600
579,600
355,600
LESS: Beginning merchandise inventory
75,600
103,600
61,600
Required inventory purchases
$406,000
$476,000
$294,000
Schedule of Expected Cash Disbursements for Merchandise Purchases
April
May
June
Quarter
Beginning accounts payable
$99,400
$99,400
April purchases
203,000
203,000
406,000
May purchases
238,000
238,000
476,000
June purchases
147,000
147,000
Total cash disbursements
$302,400
$441,000
$385,000
$1,128,400
Garden Sales, Inc.
Cash Budget
For the Quarter Ended June 30
April
May
June
Quarter
Beginning cash balance
$46,000
$40,400
$40,800
$127,200
Add collections from customers
304,800
570,400
640,000
1,515,200
Total cash available
350,800
610,800
680,800
1,642,400
Less cash disbursements:
Purchases for inventory
302,400
441,000
385,000
1,128,400
Selling expenses
74,000
94,000
55,000
223,000
Administrative expenses
26,000
40,000
18,400
84,400
Land purchases
32,000
32,000
Dividends paid
24,000
24,000
Total cash disbursements
426,400
607,000
458,400
1,491,800
Excess (deficiency) of cash available over disbursements
(75,600)
3,800
222,400
150,600
Financing:
Borrowings
116,000
37,000
153,000
Repayment
0
0
153,000
153,000
Interest
0
0
2,690
2,690
Total financing
116,000
37,000
155,690
308,690
Ending cash balance
$40,400
$40,800
$378,090
$459,290
Schedule of Expected Cash Collections
April
May
June
Quarter
Cash sales
$108,000
$148,000
$88,000
$344,000
Sales on account:
February
12,800
12,800
March
140,800
17,600
158,400
April
43,200
345,600
43,200
432,000
May
59,200
473,600
532,800
June
35,200
35,200
Total cash collections
$304,800
$570,400
$640,000
$1,515,200
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