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:
Budgeted monthly absorption costing income statements forApril–July are:
| April | May | June | July |
| Sales | $ | 510,000 | $ | 1,040,000 | $ | 490,000 | $ | 390,000 |
| Cost of goods sold | | 357,000 | | 728,000 | | 343,000 | | 273,000 |
| Gross margin | | 153,000 | | 312,000 | | 147,000 | | 117,000 |
| Selling and administrative expenses: | | | | | | | | |
| Selling expense | | 99,000 | | 99,000 | | 60,000 | | 39,000 |
| Administrative expense* | | 44,500 | | 60,000 | | 37,400 | | 37,000 |
| Total selling and administrative expenses | | 143,500 | | 159,000 | | 97,400 | | 76,000 |
| Net operating income | $ | 9,500 | $ | 153,000 | $ | 49,600 | $ | 41,000 |
|
*Includes $22,000 of depreciation each month.
Sales are 20% for cash and 80% on account.
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 $205,000, and March’s sales totaled $245,000.
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 $104,300.
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 $71,400.
Dividends of $29,000 will be declared and paid in April.
Land costing $37,000 will be purchased for cash in May.
The cash balance at March 31 is $51,000; the company mustmaintain a cash balance of at least $40,000 at the end of eachmonth.
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
The company’s president is interested in knowing how reducinginventory levels and collecting accounts receivable sooner willimpact the cash budget. He revises the cash collection and endinginventory 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 athree-month period with 25% collected in the month of sale, 65%collected in the month following sale, and 10% in the second monthfollowing sale. Credit sales from February and March are collectedduring the second quarter using the collection percentagesspecified 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 thefollowing month. The merchandise inventory at March 31 remains$71,400 and accounts payable for inventory purchases at March 31remains $104,300.
Required:
1. Using the president’s new assumptions in (a) above, prepare aschedule of expected cash collections for April, May, and June andfor the quarter in total.
2. Using the president’s new assumptions in (b) above, preparethe 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. Using the president’s new assumptions, prepare a cash budgetfor April, May, and June, and for the quarter in total.
