Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2729617 • 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:
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 $265,000, and March’s sales totaled $280,000.
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 $121,100.
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 $85,400.
The cash balance at March 31 is $58,000; the company must maintain a cash balance of atleast $40,000 at the end of each month.
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.
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 inventory assumptions as follows:
Sales continue to be 20% for cash and 80% on credit. However, credit sales from April, May, and June are collected over a three-month period with 25% collected in the month of sale, 65% collected in the month following sale, and 10% in the second month following sale. Credit sales from February and March are collected during the second quarter using the collection percentages specified in the main section.
The company maintains its ending inventory levels for April, May, and June at 15% of the cost of merchandise to be sold in the following month. The merchandise inventory at March 31 remains $85,400 and accounts payable for inventory purchases at March 31 remains $121,100.
Using the president’s new assumptions in (1) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total.
Using the president’s new assumptions in (2) above, prepare the following for merchandise inventory:
A merchandise purchases budget for April, May, and June.
A schedule of expected cash disbursements for merchandise purchases for April, May, and June and for the quarter in total.
Using the president’s new assumptions, prepare a cash budget for April, May, and June, and
for the quarter in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
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:
Explanation / Answer
1. Cash collections for February and March sales: For February sale, 20% of on account sales will be collected in April and for March sales, 70% of on account sales will be collected in April and 20% in May. Similarly, calculations have been done for April to June sales as well.
Total cash collected in the quarter = 433,200+806,000+854,000 = $2,103,200
2a. cost of goods sold = opening inventory+purchases - closing inventory
or, purchases = cost of goods sold - opening inventory + closing inventory. The opening and closing inventory calculation and inventory purchase is given below:
2b.
Total payments for the quarter = 350,075+589,225+554,400 = $1,493,700
3. amount to be borrowed = minimum cash balance of 40,000 - closing balance before loan. For April (as shown in the table below), difference = 57,375. Thus loan amount will be = 58,000 (as it has to be in increments of $1,000).
Amount of loan taken in April = $58,000. Interest rate = 1% per month. For 3 months interest = 58,000*3% = 1740
February March April May June Total sales 265,000 280,000 610,000 1,110,000 570,000 Sales on account (80% of total sales) 212,000 224,000 488,000 888,000 456,000 COLLECTIONS 20% of February's on account sales 42,400 70% of March's on account sales 156,800 20% of March's on account sales 44,800 20% cash sales 122,000 222,000 114,000 25% collection of on account sales 122,000 222,000 114,000 65% collection of on account sales 317,200 577,200 10% collection of on account sales 48,800 Total cash collections 443,200 806,000 854,000Related Questions
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