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 406,000 546,000 280,000 266,000 174,000 234,000 120,000 114,000 May Sales Cost of goods sold S 580,000 780,000 $ 400,000 $ 380,000 Gross margin Selling expense Administrative expense" 78,000 98,000 59,000 38,000 44,000 59,200 36,800 36,000 122,000 157,200 95,800 74,000 $ 52,000 76,800 $ 24.200 $ 40,000 Total selling and administrative expenses Net operating income Includes $21,000 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, 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 $195,000, and March's sales totaled $240,000 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 $107,800 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 $81,200 f. Dividends of $28,000 will be declared and paid in April. g. Land costing $36,000 will be purchased for cash in May h. The cash balance at March 31 is $50,000; the company must maintain a cash balance of atleast $40,000 at the end of each month ements of i. The company has an agreement with a local bank that allows the company to borrow in incr $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. T would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter he o

Explanation / Answer

Sales Budget April May June Quarter July Sales 580000 780000 400000 1760000 380000 Cash sales 116000 156000 80000 352000 Credit sales 464000 624000 320000 1408000 1. Schedule of expected cash collections for April, May & June & the quarter April May June Quarter Cash sales 116000 156000 80000 352000 Sales on account Feb 31200 31200 Mar 134400 38400 172800 Apr 46400 324800 92800 464000 May 62400 436800 499200 June 32000 32000 Total Cash collections 328000 581600 641600 1551200 2..a.Merchandise Purchases Budget April May June Quarter Budgeted COGS 406000 546000 280000 1232000 266000 Add:DesiredEndingInv. 109200 56000 53200 53200 Total Needs 515200 602000 333200 1285200 Less Beginning Inv. 81200 109200 56000 81200 Req.Inv.purchases 434000 492800 277200 1204000 b.Schedule of expected cash disbursements for merchandise purchases April May June Quarter Beginning a/cs payable 53900 53900 April Purchases 217000 217000 434000 May 246400 246400 492800 June 138600 138600 Total cash disbursements 270900 463400 385000 1119300 3..Cash budget for April, May ,June & the quarter April May June Quarter Beginning cash balance 50000 40100 40100 50000 Add: Collection from customers 328000 581600 641600 1551200 Total cash available 378000 621700 681700 1601200 Less: Cash disbursements: Purchases for Inventory 270900 463400 385000 1119300 Selling expenses 78000 98000 59000 235000 Admn. Exp. 23000 38200 15800 77000 Land purchase 36000 36000 Dividends paid 28000 28000 Total cash disbursements 399900 635600 459800 1495300 Excess/(Deficiency) -21900 -13900 221900 105900 Financing: Borrowings 62000 54000 116000 Repayment 116000 116000 Interest 2940 2940 Total financing 62000 54000 -118940 -2940 Ending Cash balance 40100 40100 102960 102960 Interest = (62000*1%*3)+(54000*1%*2)=2940

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