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 Apri-July are May April S 550,000 750,000 450,000 S 350,000 July Sales Cost of goods sold Gross margin Selling and administrative expenses: 245,000 165,000 75,000 117,500 135,000 56,000 35.000 91,000 105,000 35,000 68,000 Selling expense 95,000 151,800 Total selling and administrative expenses Net operating income Includes $17,000 of depreciation each month. b. Sales are 20% for cash and 80% on account. c. Sales on account are collected o er a three-month period with 10% collected in the month of sale; 80% collected in the st month ollowing the month of sale; and the emaining 10% collected in the second month following the month of sale. February's sales totaled $165,000, and March's sales totaled $225,000. d. Inventory purchases are paid for within 15 days. Therefore, 50% of a months inventory purchases are paid or in the month o purchase. The remaining 50% s aid in the following month. Accounts payable at March 31 or inventory purchases during March total $101,500 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 $77,000 f. Dividends of $25,000 will be declared and paid in April. g. Land costing $33,000 will be purchased for cash in May. h. The cash balance at March 31 is $47,000; the company must maintain a cash balance of at least $40,000 at the end of each month. í 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 S200 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. Schedule of Expected Cash Collections June Quarter Cash sales Sales on account Februany March Apri May June Total cash collections

Explanation / Answer

1) Schedule of Expected cash collection April May June Quarter Cash sales 110000 150000 90000 350000 Sales on account February (132000*10%) 13200 13200 March (180000*80%;10%) 144000 18000 162000 April (440000*10%;80%;10%) 44000 352000 44000 440000 May (600000*10%;80%) 60000 480000 540000 June (360000*10%) 36000 36000 Total cash collections 311200 580000 650000 1541200 2) Merchandise purchase budget April May June Budgeted cost of goods sold 385,000 525,000 315,000 Add: ending inventory 105000 63000 70000 Total needs 490,000 588,000 385,000 less:Beginning inventory 77,000 105,000 63,000 Required inventory purchases 413,000 483,000 322,000 b) Schedule of Expected Cash Disbursements for Merchandise purchase April May June Quarter Beginning accounts payable 101,500 101,500 April purchases 206500 206500 413000 May purchases 241500 241500 483000 June purchases 161000 161000 total cash disbursements 308,000 448000 402500 1,158,500 3) Cash budget April May June Quarter Beginning cash balance 47,000 40,700 40,900 47,000 Add collections from customers 311200 580000 650000 1541200 total cash available 358,200 620700 690900 1588200 less cash Disbursements purchase of inventory 308,000 448000 402500 1,158,500 selling expenses 75,000 95,000 56,000 226,000 administrative expenses 25500 39800 18000 83300 land purchases 0 33,000 0 33000 dividends paid 25,000 0 0 25,000 total cash disbursements 433,500 615800 476500 1,525,800 Excess(Deficiency)of cash available -75,300 4900 214400 62,400 Financing Borrowing 116,000 36,000 0 152,000 Repayment 0 0 -152,000 -152000 interest 0 0 -4,200 -4200 total financing 116,000 36,000 -156200 -4,200 ending cash balance 40,700 40,900 58200 58,200 interest = 116000*1%*3 3480 36000*1%*2 720 4200

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