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Garden Sales, Incorporated, usually has to borrow money during the second quarter to support peak sales of lawn care equipment during May. It gathered the

Garden Sales, Incorporated, usually has to borrow money during the second quarter to support peak sales of lawn care equipment
during May. It gathered the following information to prepare a cash budget for the quarter:
a. Budgeted monthly absorption costing income statements for April-July are:
*Includes $37,000 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 $305,000, and March's sales totaled $320,000.
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% are paid in the following month. Accounts payable at March 31 for inventory purchases during March
total $140,700.
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 $102,200.
f. Dividends of $44,000 will be declared and paid in April.
g. Land costing $56,000 will be purchased for cash in May.
h. The cash balance at March 31 is $66,000; 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 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:
a. 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.
b. 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 $102,200 and accounts payable for inventory purchases at March
31 remains $140,700.
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