Reference no: EM133541885

Question: Garden Sales, Incorporated, 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                                                                        $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    

          Administrative expense                                     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 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 $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 of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $126,000.

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 $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 must maintain a cash balance of at least $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.

Required:

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

2. Develop 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. Develop a cash budget for April, May, and June as well as in total for the quarter.