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 a. Budgeted monthly absorption costing income statements for April-July are April June Sales Cost of goods sold Gross margin Selling and administrative expenses: $ 810,000 $950,000 650,000 $560,000 392,000 665,000 567,000 243,000 455,000 195,000 114,000 74,200 Selling expense Administrative expense Total selling and administrative expenses Net operating income 95,000 52,500 147,500 76,000 47,000 56,000 53,000 $95,500 96,800 72,000 59,000 ncludes $37,000 of depreciation each month. 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: 70% collected in the first month d. Inventory purchases are paid for within 15 days. Therefore, 50% of a month's inventory purchases are paid for in the month of e. Each month's ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise following the month of sale, and the remaining 20% collected in the second month following the month of sale. February's sales totaled $305,000, and March's sales totaled $320,000 purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $146,300 inventory at March 31 is $113,400 f. Dividends of $44,000 will be declared and paid in April g. Land costing $56,000 will be purchased for cash in May h. The cash balance at March 31 is $66,000; the company must maintain a cash balance of at least $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

Explanation / Answer

CASH BUDGET

April

May

June

Quarter

Beginning cash balance

66000

40000

113100

66000

Cash sales

162000

190000

130000

482000

Cash received from customers

292800

580800

713600

1587200

Total

520800

810800

956700

2135200

Cash Outflows

Payment to creditors or accounts payable

-439600

-604800

-532700

-1577100

Selling expense

-95000

-114000

-76000

-285000

Administrative exp

(After deducting
depreciation)

-15500

-37200

-10000

-62700

Dividend

-44000

-44000

Land

-56000

-56000

Total

-594100

-812000

-618700

-2024800

Excess/-Deficient cash

-73300

-1200

338000

110400

Finance required

113300

114300

0

227600

Less:

Interest on April's borrowed amount

(113300*1%*3 months)

-3399

-3399

Interest on May's borrowed amount

(114300*1%*2 months)

-2286

-2286

Principal repayment

(113300+114300)

-227600

-227600

Closing cash balance

(minimum $40000)

40000

113100

104715

104715

WORKING OF CASH RECIEPTS FROM DEBTORS AND CASH PAYMENTS FOR INVENTORY AND INVENTORY PURCHASE

April

May

June

Total

Sales

(A)

810000

950000

650000

2410000

Cash sale of 20%

(B) = (A) * 20%

162000

190000

130000

482000

Collection from Debtors

February sale

(305000 * 80%*20%)

48800

48800

March Sales

(320000 *80%* 70%)

179200

179200

(320000 *80%* 20%)

51200

51200

April Sales (80%)

in the ratio
of (10:70:20)

64800

453600

129600

648000

May Sales (80%)

in the ratio
of (10:70)

76000

532000

608000

June Sales (80%)

10%

52000

52000

Total

292800

580800

713600

1587200

Inventory purchase

Cost of goods sold

567000

665000

455000

1687000

Add: Closing stock

(20% of following month's
cost of goods sold)

133000

91000

78400

78400

Less: Opening stock

-113400

-133000

-91000

-113400

Inventory purchase

586600

623000

442400

1652000

Payment to Creditors for inventory

50% of current month's purchase

293300

311500

221200

826000

50% of previous month's purchase

146300

293300

311500

751100

Total payment to Creditors

439600

604800

532700

1577100

April

May

June

Quarter

Beginning cash balance

66000

40000

113100

66000

Cash sales

162000

190000

130000

482000

Cash received from customers

292800

580800

713600

1587200

Total

520800

810800

956700

2135200

Cash Outflows

Payment to creditors or accounts payable

-439600

-604800

-532700

-1577100

Selling expense

-95000

-114000

-76000

-285000

Administrative exp

(After deducting
depreciation)

-15500

-37200

-10000

-62700

Dividend

-44000

-44000

Land

-56000

-56000

Total

-594100

-812000

-618700

-2024800

Excess/-Deficient cash

-73300

-1200

338000

110400

Finance required

113300

114300

0

227600

Less:

Interest on April's borrowed amount

(113300*1%*3 months)

-3399

-3399

Interest on May's borrowed amount

(114300*1%*2 months)

-2286

-2286

Principal repayment

(113300+114300)

-227600

-227600

Closing cash balance

(minimum $40000)

40000

113100

104715

104715

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