50.1K

Verified Solution

Link Copied!

Garden Sales, Inc., sells garden supplies. Management isplanning its cash needs for the second quarter. The company usuallyhas to borrow money during this quarter to support peak sales oflawn care equipment, which occur during May. The followinginformation has been assembled to assist in preparing a cash budgetfor the quarter:

  

a.	Budgeted monthly absorption costing income statements forApril–July are:

	April		May		June		July
Sales	$	600,000	$	900,000	$	500,000	$	400,000
Cost of goods sold		420,000		630,000		350,000		280,000
Gross margin		180,000		270,000		150,000		120,000
Selling and administrative expenses:
Selling expense		79,000		120,000		62,000		51,000
Administrativeexpense*		45,000		52,000		41,000		38,000
Total selling and administrative expenses		124,000		172,000		103,000		89,000
Net operating income	$	56,000	$	98,000	$	47,000	$	31,000

*Includes $20,000 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 with10% collected in the month of sale; 70% collected in the firstmonth following the month of sale; and the remaining 20% collectedin the second month following the month of sale. February’s salestotaled $200,000, and March’s sales totaled $300,000.
d.	Inventory purchases are paid for within 15 days. Therefore, 50%of a month’s inventory purchases are paid for in the month ofpurchase. The remaining 50% is paid in the following month.Accounts payable at March 31 for inventory purchases during Marchtotal $126,000.
e.	Each month’s ending inventory must equal 20% of the cost of themerchandise to be sold in the following month. The merchandiseinventory at March 31 is $84,000.
f.	Dividends of $49,000 will be declared and paid in April.
g.	Land costing $16,000 will be purchased for cash in May.
h.	The cash balance at March 31 is $52,000; the company mustmaintain a cash balance of atleast $40,000 at the end of eachmonth.
i.	The company has an agreement with a local bank that allows thecompany to borrow in increments of $1,000 at the beginning of eachmonth, up to a total loan balance of $200,000. The interest rate onthese loans is 1% per month and for simplicity we will assume thatinterest is not compounded. The company would, as far as it isable, repay the loan plus accumulated interest at the end of thequarter.

   

Required:
1.	Prepare a schedule of expected cash collections for April, May,and June, and for the quarter in total.

     

2.	Prepare the following for merchandise inventory:

   

a.	A merchandise purchases budget for April, May, and June.

         

b.	A schedule of expected cash disbursements for merchandisepurchases for April, May, and June, and for the quarter intotal.

         

3.	Prepare a cash budget for April, May, and June as well as intotal for the quarter. (Cash deficiency, repayments andinterest should be indicated by a minus sign.)