Chapter 8, Problem 24P

PROBLEM 8-24 Cash Budget with Supporting Schedules LO8-2 L08-4, LO8-8

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 page 403 information has been assembled lo assist in preparing a cash budget for the quarter:

1. Budgeted monthly absorption casting 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……..	24,000	172,000	103,000	89,000
Net operating Income	$ 56.000	$ 98,000	$ 47,000	$ 31,000

*Includes $20,000 of depreciation each month.

1. Sales are 20% for cash and 80% on account.
2. Sales on account ate 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.
3. 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.
4. Each month's ending inventory must equal 20% of the cost of the merchandise to be sold m the following month. The merchandise inventory at March 31 is $84,000
5. Dividends of $49,000 will be declared and paid in April
6. Land costing $16,000 will be purchased for cash in May.
7. 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.
8. The company has an agreement with a local bank that aliases the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of 5200.000 The interest rate on these loons is l° n per month and for simplicity we will assume that interest is not compounded. The company would, as for as it is able, repay the loan phis accumulated interest at the end of the quarter

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 merchandise purchases for April, May, and June, and for the quarter in total
3. Prepare a cash budget for April, May and June as well as in total for the quarter.