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 476,000 560,000 197,400 322,000 204,000 40,000 84,600 138,000 June July Sales $680,000 $ 800,000 $ 282,000 $ 460,000 Cost of goods sold Gross margin Seling and administrative expenses Selling expense Administrative expense* 86,000 115,000 32,500 46,000 48,000 79,400 31,000 44,000 134,000 194,400 63,500 90,000 $ 70,000 $ 45,600 $ 21,100 $ 48,000 Total selling and administrative expenses Net operating income Includes $19,500 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 $175,000, and March's sales totaled $295,000 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 $130,200 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 $95,200 f. Dividends of $35,000 will be declared and paid in April g.Land costing $43,000 will be purchased for cash in May h. The cash balance at March 31 is $57,000; the company must maintain a cash balance of atleast $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

1. Schedule of expected cash collection:- Garden Sales Inc Schedule of expected cash collection April May June Quarter Cash Sales 136,000 160000 56400 352,400 Sales On Account:- February 28000 28000 March 165200 47200 212400 April 54400 380800 108800 544000 May 54400 380800 435200 June 54400 54400 Total Cash Collection 383,600 642,400 600,400 1,626,400 2. Merchandise purchase Budget:- Garden Sales Inc Merchandise purchase Budget April May June Quarter Budgeted Cost of goods sold 476000 560000 197400 1233400 Opening Inventory 95200 112000 39480 246680 Total Needs 380800 448000 157920 986720 Closing Inventory 112000 39480 92000 243480 Required Inventory Purchase 492800 487480 249920 1230200 3. Schedule of Expected cash disbursement for Merchandise purchase :- Garden Sales Inc Schedule of Expected cash disbursement for Merchandise purchase April May June Quarter Beginning Accounts Payable 130200 130200 April Purchases 246400 246400 492800 May Purchases 243740 243740 487480 June Purchases 124960 124960 Total Cash Disbursement 376600 490140 368700 1235440 4. Cash Budget Garden Sales Inc Cash Budget April May June Quarter Beginning Cash Balance 57000 40500 42120 139620 (+) Collection from Customer 383,600 642,400 600,400 1626400 Total Cash Available 440,600 682,900 642,520 1766020 (-) Cash Disbursement:- Purchases for Inventory 376600 490140 368700 1235440 Selling Expenses 86000 115000 32500 233500 Administrative Expenss 28500 59900 11500 99900 Land Purchase 43000 43000 Dividends Paid 35000 35000 Total Cash Disbursement 526100 708040 412700 1646840 Excess / (Deficieny) of cash available for disbursement -85,500 -25,140 229,820 119180 Financing:- Borrowing 126000 66000 0 192000 Repayment 189,820 189820 Interest 1260 34 1294 Total Financing 126000 67260 3,474 196734 Ending cash balance 40,500 42,120 40,000 122620

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