Garden Sales, Inc., sells garden supplies. Management is planning its cash needs
ID: 2732632 • 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 absorption costing income statements for April–July are: April May June July Sales $ 460,000 $ 990,000 $ 440,000 $ 340,000 Cost of goods sold 322,000 693,000 308,000 238,000 Gross margin 138,000 297,000 132,000 102,000 Selling and administrative expenses: Selling expense 89,000 94,000 55,000 34,000 Administrative expense* 42,000 56,000 34,400 32,000 Total selling and administrative expenses 131,000 150,000 89,400 66,000 Net operating income $ 7,000 $ 147,000 $ 42,600 $ 36,000 *Includes $16,000 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 $160,000, and March’s sales totaled $220,000. 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 $93,800. 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 $64,400. f. Dividends of $24,000 will be declared and paid in April. g. Land costing $32,000 will be purchased for cash in May. h. The cash balance at March 31 is $46,000; 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. 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: 1. 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. 2. 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 $64,400 and accounts payable for inventory purchases at March 31 remains $93,800. Required: 1. 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. 2. Using the president’s new assumptions in (2) above, prepare the following for merchandise inventory: a. A merchandise purchases budget for April, May, and June. b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June and for the quarter in total. 3. 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.)
Explanation / Answer
Answer 1 Budget of cash collection April May June Total Sale (Amount) 460000 990000 440000 1890000 Cash Sales 92000 198000 88000 378000 Credit Sales 368000 792000 352000 1512000 Cash collection from Clients February 25600 0 0 25600 March 123200 35200 0 158400 April 92000 239200 36800 368000 May 0 198000 514800 712800 June 0 0 88000 88000 Total Cash Collection 332800 670400 727600 1730800 Answer 2 Merchandising Purchase budget April May June Total Sales Requirement 322000 693000 308000 1323000 Closing Inventory 103950 46200 35700 185850 Gross Need 425950 739200 343700 1508850 Less Opening Inv. 64400 103950 46200 214550 Merchandise Required 361550 635250 297500 1294300 Cash Disbursement March 93800 0 0 93800 April 180775 180775 361550 May 0 317625 317625 635250 June 0 0 148750 148750 Total Disbursement 274575 498400 466375 1239350 Answer3 Cash Budget April May June Total Opening Cash Balance 46000 40,225 46,225 46000 Cash Collection 332800 670400 727600 1730800 Total Cash 378800 710625 773825 1776800 Cash disbursement Purchase 274575 498400 466375 1239350 Selling Expenses 89000 94000 55000 238000 Administrative Expenses 26000 40000 18400 84400 Dividend 24000 0 0 24000 Land 0 32000 0 32000 Total Cash Requirement 413575 664400 539775 1617750 Cash balance after payments (34,775) 46,225 234,050 159,050 Borrowing from Bank 75000 0 (75,000) - Bank Inetrest 0 0 (2,250) (2,250) Cash Balance 40,225 46,225 156,800 156,800
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