Problem 9-23 Cash Budget with Supporting Schedules; Changing Assumptions [LO9-2, LO9-4, LO9-8]

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 AprilJuly are:

	April			May			June			July
Sales	$	490,000		$	1,020,000		$	470,000		$	370,000
Cost of goods sold		343,000			714,000			329,000			259,000
Gross margin		147,000			306,000			141,000			111,000
Selling and administrative expenses:
Selling expense		95,000			97,000			58,000			37,000
Administrative expense*		43,500			58,400			36,200			35,000
Total selling and administrative expenses		138,500			155,400			94,200			72,000
Net operating income	$	8,500		$	150,600		$	46,800		$	39,000

*Includes $19,000 of depreciation each month.

2. Sales are 20% for cash and 80% on account.
3. 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 $185,000, and Marchs sales totaled $235,000.
4. 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 $100,100.
5. 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 $68,600.
6. Dividends of $27,000 will be declared and paid in April.
7. Land costing $35,000 will be purchased for cash in May.
8. The cash balance at March 31 is $49,000; the company must maintain a cash balance of atleast $40,000 at the end of each month.
9. 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:

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 $68,600 and accounts payable for inventory purchases at March 31 remains $100,100.

Required:

1. Using the presidents new assumptions in (1) 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 (2) 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. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Schedule of Expected Cash Collections April May June $ 98,000 $ 204,000 $ 94,000 Quarter Cash sales 396,000 Sales on account: February 29,600 29,600 March 62,000 173,600 39,200 April May 274,400 81,600 78,400 571,200 37,600 781,200 235,600 392,000 652,800 37,600 1,743,600 June Total cash collections $ 340,400 $ 622,000 $ $ June 329,000 Merchandise Purchases Budget April Budgeted cost of goods sold 343,000 $ Add: Desired ending merchandise inventory 142,800 Total needs 485,800 Less: Beginning merchandise inventory 68,600 Required inventory purchases $ 417,200 $ 51,800 May 714,000 $ 65,800 779,800 142,800 637,000 $ 380,800 65,800 315,000 Schedule of Expected Cash Disbursements for Merchandise Purchases April May June Quarter Beginning accounts payable $ 100,100 $ 100,100 April purchases 208,600 208,600 417,200 May purchases 318,500 318,500: 637,000 June purchases 157,500 157,500 Total cash disbursements $ 308,700 $ 527,100 $ 476,000 $1,311,800 Garden Sales, Inc. Cash Budget For the Quarter Ended June 30 April $ 49,000 May June Quarter Beginning cash balance Add collections from customers Total cash available 49,000 0 0 Less cash disbursements: Purchases for inventory 308,700 527,100 476,000 1,311,800 Selling expenses Administrative expenses 95,000 24,500 97,000 39,400 35,000 58,000 17,200 Land purchases Dividends paid 250,000 81,100 35,000 27,000 1,704,900 (1,704,900) 27,000 Total cash disbursements 455,200 698,500 551,200 (551,200) (406,200) (698,500) Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing 0 0 0 Ending cash balance $ (406,200) $ (698,500) $ (551,200) $ (1,704,900)