Problem 8 25 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 Budgeted monthly absorption costing income statements for AprilJuly are April May June July Sales $ 480,000 $ 1,010,000 $ 460,000 $ 360,000 Cost of goods sold 336,000 707,000 322,000 252,000 Gross margin 144,000 303,000 138,000 108,000 Selling and administrative expenses Selling expense 93,000 96,000 57,000 36,000 Administrative expense 43,000 57,600 35,600 34,000 Total selling and administrative expenses 136,000 153,600 92,600 70,000 Net operating income $ 8,000 $ 149,400 $ 45,400 $ 38,000 Includes $18,000 of depreciation each month Sales are 20 for cash and 80 on account 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 Februarys sales totaled $175,000, and Marchs sales totaled $230,000 Inventory purchases are paid for within 15 days Therefore, 50 of a months 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 $98,000 Each months 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 $67,200 Dividends of $26,000 will be declared and paid in April Land costing $34,000 will be purchased for cash in May The cash balance at March 31 is $48,000 the company must maintain a cash balance of at least $40,000 at the end of each month 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 companys 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 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 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 $67,200 and accounts payable for inventory purchases at March 31 remains $98,000 Required 1 Using the presidents new assumptions in (a) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total 2 Using the presidents new assumptions in (b) above, 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 Using the presidents new assumptions, prepare a cash budget for April, May, and June, and for the quarter in total

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Problem 8-25 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

Problem 8-25 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:

Budgeted monthly absorption costing income statements for AprilJuly are:

	April		May		June		July
Sales	$	480,000	$	1,010,000	$	460,000	$	360,000
Cost of goods sold		336,000		707,000		322,000		252,000
Gross margin		144,000		303,000		138,000		108,000
Selling and administrative expenses:
Selling expense		93,000		96,000		57,000		36,000
Administrative expense*		43,000		57,600		35,600		34,000
Total selling and administrative expenses		136,000		153,600		92,600		70,000
Net operating income	$	8,000	$	149,400	$	45,400	$	38,000

*Includes $18,000 of depreciation each month.

Sales are 20% for cash and 80% on account.
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. Februarys sales totaled $175,000, and Marchs sales totaled $230,000.
Inventory purchases are paid for within 15 days. Therefore, 50% of a months 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 $98,000.
Each months 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 $67,200.
Dividends of $26,000 will be declared and paid in April.
Land costing $34,000 will be purchased for cash in May.
The cash balance at March 31 is $48,000; the company must maintain a cash balance of at least $40,000 at the end of each month.
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 companys 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:

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.
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 $67,200 and accounts payable for inventory purchases at March 31 remains $98,000.

Required:

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

2. Using the presidents new assumptions in (b) above, 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. Using the presidents new assumptions, prepare a cash budget for April, May, and June, and for the quarter in total.