Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2382216 • 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 income statements for April–July are:
April May June July
Sales $500,000 $800,000 $600,000 $550,000
Cost of goods sold 350,000 560,000 420,000 385,000
Gross margin 150,000 240,000 180,000 165,000
Less operating expenses:
Selling expense 75,000 108,000 79,000 74,000
Administrative expense* 35,000 38,000 37,000 38,000
Total expenses 110,000 146,000 116,000 112,000
Net operating income $ 40,000 $ 94,000 $ 64,000 $ 53,000
*Includes $15,000 depreciation each month.
b. Sales are 25% for cash and 75% on account.
c. Sales on account are collected over a three-month period as follows: 5% collected in the month of sale; 60% collected in the first month following the month of sale; and the remaining 35% collected in the second month following the month of sale. February’s sales totaled $400,000, and March’s sales totaled $450,000.
d. Inventory purchases are paid for as follows: 40% of a month’s inventory purchases are paid for in the month of purchase; the remaining 60% are paid in the following month. Accounts payable at March 31 for inventory purchases during March total $191,100.
e. At the end of each month, inventory must be on hand equal to 10% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $35,000.
f. Dividends of $35,000 will be declared and paid in April.
g. Land costing $12,000 will be purchased for cash in May.
h. The cash balance at March 31 is $36,000; the company must maintain a cash balance of at least $30,000 at all times.
i. The company can borrow from its bank as needed to bolster the Cash account. Borrowings and repayments must be in multiples of $1,000. All borrowings take place at the beginning of a month, and all repayments are made at the end of a month. The annual interest rate is 12%. Compute interest on whole months (1/12, 2/12, and so forth).
Required:
1. Prepare a schedule of expected cash collections from sales for each of the months April, May, and June, and for the quarter in total.
2. Prepare the following for merchandise inventory:
a. An inventory purchases budget for each of the months April, May, and June.
b. A schedule of expected cash disbursements for inventory for each of the months April, May, and June, and for the quarter in total.
3. Prepare a cash budget for the third quarter, by month as well as in total for the quarter. Show borrowings from the company’s bank and repayments to the bank as needed to maintain the minimum cash balance.
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Explanation / Answer
Requirement -1 Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total. February March April May June July Cash sales 7350 11400 13500 23850 17550 15900 Account sales 17150 26600 31500 55650 40950 37100 Total Sales 24500 38000 45000 79500 58500 53000 Cash Collections: February March April May June July First Month (10%) 1715 2660 3150 5565 4095 3710 Second Month (60%) 10290 15960 18900 33390 24570 Third Month (30%) 5145 7980 9450 16695 Collection from Customers 24255 32445 46935 Cash Sales 13500 23850 17550 Total Cash Collection: 37755 56295 64485 For the Quarter 158535 Requirement - 2 (a) Compute the required inventory purchases for april, May, and June. Purchases April 13114 May 53715 June 27285 * COGS = Cost Of Goods Sold Workings for April: Used Stock should be 70% It means Cost of Goods Sold = 70% and Closing Stock 30% Cost of Goods Sold 18000 Closing Stock 70 % ---18000 30 % ---? Closing stock 7714 Opening Stock = Last month closing stock Cost of Goods Sold = Opening Stock + Purchases - Closing Stock 18000 = 12600 + Purchases - 7714 Purchases = 25714 - 12600 Purchases = 13114 Working for May: Cost of Goods Sold 43000 Closing stock 70% --43000 30%---? Closing stock 18429 Cost of Goods Sold = Opening Stock + Purchases - Closing Stock 430000 = 7714 + Purchases - 18429 Purchases = 61429 - 7714 Purchases = 53715 Working for June: Cost of Goods Sold 32000 Closing Stock 70% -- 32000 30% --? Closing Stock 13714 Cost of Goods Sold = Opening Stock + Purchases - Closing Stock 32000 = 18429 + Purchases - 13714 Purchases = 45714 - 18429 Purchases = 27285 (b) Compute the total cash disbursements for merchandise purchases for april, May, and June, and for the quarter in total Purchases March April May June Quarter Purchases 11700 13114 53715 27285 94114 April May June Quarter Cash disbursements 5850 26857.5 26857.5 6557 6557 13642.5 12407 33414.5 40500 86322 Requirement - 3 Prepare a cash budget for April, May, and June as well as in total for the quarter. (Cash deficiencies and total financing should be preceded by a minus sign when appopriate.) Garden Sales, Inc; Cash Budget For the Quarter Ended June 30 April May June Quarter Cash balance beginning of the quarter 8000 19648 16428 8000 Add Receipts: Collection from Customers 24255 32445 46935 103635 Cash Sales 13500 23850 17550 54900 Total Cash Available 45755 75943 80913 166535 Less Disbursements: Material Purchases 12407 33415 40500 86322 Adm Exp 4500 7800 6600 18900 Selling Exp 6200 11700 7500 25400 Depreciation 2000 2000 2000 6000 Dividends paid 1000 1000 Land purchases 4600 4600 Total Disbursements: 26107 59515 56600 142222 Excess/ deficiency 19648 16428 24313 24313 Cash Balance at Quarter Ending 19648 16428 24313
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