Skolt Products, Inc., is a merchandising company that sells binders, paper, and

Question

Skolt Products, Inc., is a merchandising company that sells binders, paper, and other school supplies. The company is planning its cash needs for the third quarter. In the past, Skolt Products has had to borrow money during the third quarter to support peak sales of back-to-school materials, which occur during August. The following information has been assembled to assist in prepaing a cash budget for the quarter: a. Budgeted monthly absorption costing income statements for July-October are as follows July $60,000 36,000 August $86,000 51,600 September $78,000 46,800 October $66,000 39,600 Sales Cost of goods sold Gross margin Selling and administrative expenses 24,000 34,400 31,200 26,400 14,500 9,360 Selling expense Administrative expense* 7,200 7,920 4,300 11,500 $12,500 6,600 21,100 $13,300 6,000 15,360 $15,840 5,600 13,520 $12,880 Total selling and administrative expenses Net operating income ncludes $1,000 depreciation each month b. Sales are 20% for cash and 80% on credit C. Credit sales are collected over a three-month period with 15% collected in the month of sale, 65% in the month following sale, and 20% in the second month following sale. May sales totaled $45,000, and June sales totaled $44,000 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 for inventory purchases at June 30 total $14,400 e. The company maintains its ending inventory levels at 25% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $9,000 f. Land costing $13,400 will be purchased in July g. Dividends of $1,700 will be declared and paid in September. h. The cash balance on June 30 is $10,000; the company must maintain a cash balance of at least this amount at the end of each montlh i. The company has an agreement with a local bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $40,000. 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. The company's president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revises the cash collection and ending invento assumptions as follows I. Sales continue to be 20% for cash and 80% on credit. However, credit sales from July, August, and September are collected over a three-month period with 25% collected in the month of sale, 55% collected in the month following sale, and 20% in the second month following sale. Credit sales from May and June are collected during the third quarter using the collection percentages specified in the main section 2. The company maintains its ending inventory levels for July, August, and September at 25% of the cost of merchandise to be sold in the following month. The merchandise inventory at June 30 remains $9,000 and accounts payable for inventory purchases at June 30 remains $14,400

Explanation / Answer

NOTE: First question is answered.

SALES BUDGET SCHEDULE May June July Aug Sept Total Sales ($) 45,000 44,000 60,000 86,000 78,000 Cash Sales: 20% ($) 9,000 8,800 12,000 17,200 15,600 Credit Sales: 80% ($) 36,000 35,200 48,000 68,800 62,400 CASH COLLECTION SCHEDULE May June July Aug Sept QUARTER Cash Collected: 15% of Credit Sales of current month ($) (1) 5,400 5,280 0 Cash Collected: 65% of Credit Sales of previous month ($) (2) 23,400 22,880 22,880 Cash Collected: 20% of Credit Sales of 2nd previous month ($) (3) 7,200 7,040 14,240 Cash Collected: 25% of Credit Sales of current month ($) (4) 12,000 17,200 15,600 44,800 Cash Collected: 55% of Credit Sales of previous month ($) (5) 26,400 37,840 64,240 Cash Collected: 20% of Credit Sales of 2nd previous month ($) (6) 9,600 9,600 ADD: Cash Collected: Cash Sales of current month ($) (7) 9,000 8,800 12,000 17,200 15,600 44,800 Total Cash Collected ($) (1) + (2) + (3) + (4) + (5) + (6) + (7) 14,400 37,480 54,080 67,840 78,640 2,00,560

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