Problem 8-25 (Algo) Cash Budget with Supporting Schedules; Changing Assumptions [LO8-2, LO8-4, 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 information has been assembled to assist in preparing a cash budget for the quarter:

1. Budgeted monthly absorption costing income statements for April-July are:

	April	May	June	July
Sales	$	430,000	$	960,000	$	410,000	$	310,000
Cost of goods sold		301,000		672,000		287,000		217,000
Gross margin		129,000		288,000		123,000		93,000
Selling and administrative expenses:
Selling expense		83,000		91,000		52,000		31,000
Administrative expense*		40,500		53,600		32,600		29,000
Total selling and administrative expenses		123,500		144,600		84,600		60,000
Net operating income	$	5,500	$	143,400	$	38,400	$	33,000

*Includes $13,000 of depreciation each month.

1. Sales are 20% for cash and 80% on account.
2. 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 $145,000, and March's sales totaled $205,000.
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 $87,500.
4. 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 $60,200.
5. Dividends of $21,000 will be declared and paid in April.
6. Land costing $29,000 will be purchased for cash in May.
7. The cash balance at March 31 is $43,000; 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 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

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:

1. 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.
2. 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 $60,200 and accounts payable for inventory purchases at March 31 remains $87,500.

Question 1)

Using the president's new assumptions in (a) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total.

Schedule of Expected Cash Collections
	April	May	June	Quarter
Cash sales
Sales on account:
February
March
April
May
June
Total cash collections

Question 2A)

Using the president's new assumptions in (b) above, prepare the following for merchandise inventory, a merchandise purchases budget for April, May, and June.

Merchandise Purchases Budget
	April	May	June
Total needs
Required inventory purchases

Question 2B)

Using the president's new assumptions in (b) above, prepare the following for merchandise inventory, a schedule of expected cash disbursements for merchandise purchases for April, May, and June and for the quarter in total.

Schedule of Expected Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
April purchases
May purchases
June purchases
Total cash disbursements

Question 3)

Using the president's new assumptions, prepare a cash budget for April, May, and June, and for the quarter in total.(Cash deficiency, repayments and interest should be indicated by a minus sign.)

Garden Sales, Inc.
Cash Budget
For the Quarter Ended June 30
	April	May	June	Quarter
Beginning cash balance
Add collections from customers
Total cash available
Less cash disbursements:
Purchases for inventory
Selling expenses
Administrative expenses
Land purchases
Dividends paid
Total cash disbursements
Excess (deficiency) of cash available over disbursements
Financing:
Borrowings
Repayment
Interest
Total financing
Ending cash balance

Expected cash collection April May June Quarter Cash Sales $ 86,000 $ 192,000 $ 82,000 $ 360,000 Sales on account: February $ 23,200 S 23,200 March S 114,800 $ 32,800 147,600 April 86,000 $ 223,600 34,400 $ 344,000 May 192,000 $ 199,200 $ 591,200 June $ 82,000 $ 32,000 Total cash collection 310,000 $ 640,400 $ 697,600 $ 1,648,000 Cash sales = Sales x Cash sales % April = 430000 x 20% 86,000 May = 960000 x 20% 192,000 June = 410000 x 20% 82,000 Quarter = Total of all 3 months 360,000 Credit sales = Sales x Credit sales % x collection % Febraury sales collected in April = 145000 x 80% x 20% 23,200 March sales collected in April = 205000 x 80% x 70% 114,800 March sales collected in May = 205000 x 80% x 20% 32,800 April sales collected in April = 430000 x 80% x 25% 86,000 April sales collected in May = 430000 x 80% x 65% 223,600 April sales collected in June = 430000 x 80% x 10% 34,400 May sales collected in May = 960000 x 80% x 25% 192,000 May sales collected in June = 960000 x 80% x 65% 499,200 June sales collected in June = 410000 x 80% x 25% 82,000 2a Merchandise Purchase Budget April May June Budgeted Cost of goods sold S 301,000 $ 672,000 |$ 287,000 Add: Desired ending inventory $ 100,800 $ 43,050 $ 2,550 Total needs $ 101,800 |$ 715,050 319,550 Less beginning inventory 60,200 |$ 100,800 $ 43,050 Required purchases S 341,600 $ 614,250 $ 276,500 Ending inventory = Cost of goods sold of next month x Ending inventory percentage April = 672000 x 15% 100,800 May = 287000 x 15% 43,050 June = 217000 x 15% 32,550 Beginning inventory = Ending inventory of last month2b Cash disbursement for merchandise purchase April May June Quarter Beginning accounts payable $ 87,500 87,500 April Purchases 170,800 $ 170,800 341,600 May Purchases $ 307,125 $ 307,125 614,250 June Purchases $ 138,250 |$ 138,250 Total cash disbursement S 258,300 $ 477,925 | $ 145,375 $ 1,181,600 Payment = Purchases x Payment % April Purchase paid in April = 341600 x 50% 170,800 April Purchase paid in May = 341600 x 50% 170,800 May Purchase paid in May = 614250 x 50% 307,125 May Purchase paid in June = 614250 x 50% 307,125 June Purchase paid in June = 276500 x 50% 138,250 3 Cash Budget April May June Quarter Beginning cash balance $ 43,000 | $ 40,200 $ 42,075 S 43,000 Add: Collection from customer 10,000 $ 640,400 $ 697,600 | $ 1,648,000 Total cash availbale S 353,000 $ 680,600 $ 739,675 $ 1,691,000 Less: Cash disbursement Purchases of inventory 258,300 | $ 477,925 $ 445,375 $ 1,181,600 Selling expense 83,000 $ 91,000 $ 52,000 226,000 Administrative expense 27,500 40,600 19,600 $ 87,700 Land Purchase 0.00 $ 29,000 $ o | $ 29,000 Dividend paid 21,000 S o S 21,000 Total cash disbursement 389,800 638,525 516,975 $ 1,545,300 Excess (deficiency) of cash (36,800) $ 42,075 | $ 222,700 IS 145,700 Financing: Borrowing 77,000 | $ O $ o | $ 77,000 Repayment O $ 77,000) $ 77,000) Interest IS o S 2,310) $ (2,310) Total financing 77,000 79,310) $ (2,310) Ending cash balance 40,200 $ 42,075 $ 143,390 143,390 Administrative expense = Administrative exp - Depreciation ( as depreciation is non cash expense) April = 40500 - 13000 27,500 May = 53600 - 13000 40,600 June = 32600 - 13000 19,600 Interest = (Borrowing in July x Rate of interest x 3 months) (77000 x 1% x 3 months) 2,310 Borrowing/ Repayment = Minimum cash required - Excess (deficiency) cash April = 40000 - (36800) $ 76,800 Round to 1000 S 77,000