Garden Sales, Inc., sells garden supplies. Management is planning its cash needs

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 $14,000 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 $150,000, 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 $120,400.

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 $72,800.

Dividends of $22,000 will be declared and paid in April.

Land costing $30,000 will be purchased for cash in May.

The cash balance at March 31 is $44,000; 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 $ 520,000 $ 720,000 $ 420,000 $ 320,000 Cost of goods sold 364,000 504,000 294,000 224,000 Gross margin 156,000 216,000 126,000 96,000 Selling and administrative expenses: Selling expense 72,000 92,000 53,000 32,000 Administrative expense* 41,000 54,400 33,200 30,000 Total selling and administrative expenses 113,000 146,400 86,200 62,000 Net operating income $ 43,000 $ 69,600 $ 39,800 $ 34,000

Explanation / Answer

1 Schedule of expected cash collections: April May June Quarter Cash sales 104000 144000 84000 332000 Sales on account Feb- 150000*0.80=120000 12000 0 0 12000 (120000*0.10) March-300000*0.80=240000 192000 24000 0 216000 (240000*0.80) (240000*0.10) April-520000*0.80=416000 41600 332800 41600 416000 (416000*0.10) (416000*0.80) (416000*0.10) May-720000*0.80=576000 0 57600 460800 518400 (576000*0.10) (576000*0.80) June-420000*0.8=336000 0 0 33600 33600 (336000*0.10) Total cash collection 349600 558400 620000 1528000 2 a. Merchandise purchases budget April May June Budgeted cost of goods sold 364000 504000 294000 Add: Desired ending merch. inventory 100800 58800 44800 (504000*20%) (294000*20%) (224000*20%) Total needs 464800 562800 338800 Less: Beginning merch. inventory 72800 100800 58800 Required inventory purchases 392000 462000 280000 b. schedule of expected cash disbursements for merchandise purchases April May June Quarter Beg. account payable 120400 0 0 120400 April Purchases-392000 196000 196000 0 392000 (392000*50%) (392000*50%) May Purchases-462000 0 231000 231000 462000 (462000*50%) (462000*50%) June Purchases-280000 0 140000 140000 (280000*50%) Total Cash disbursements 316400 427000 371000 1114400

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