Question 3 Far East Inc., is a merchandising company that sells school supplies. The company is planning its cash needs for the third quarter. The following information has been assembled to assist in preparing a cash budget for the quarter: a. Budgeted monthly absorption costing income statements for July-October are as follows: July August September October Sales $36,000 $66,000 $64,000 $41,000 Cost of goods sold |_ 21,000 |39,000 |_ 27,000 24,000 Gross margin |15,000 27,000 |_ 37,000 17,000 Selling and administrative expenses: Selling expense 6,300 10,500 8,600 8,100 Administrative expense* |_ 3,300 6,300 6,700 6,100 Total selling and administrative expenses 9,600 16,800 15,300 14,200 Net operating income $ 5,400 $10,200 $21,700 $ 2,800 *Includes $1,500 depreciation each month. b. Sales are 20% for cash and 80% on credit. c. Credit sales are collected over a three-month period with 20% collected in the month of sale, 50% in the month following sale, and 30% in the second month following sale. May sales totaled $41,000, and June sales totaled $33,000. d. 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 for inventory purchases at June 30 total $12,100. e. The company maintains its ending inventory levels at 65% of the cost of the goods sold in the following month. The merchandise inventory at June 30 is $13,650. f. Land costing $4,000 will be purchased in July. g. Dividends of $1,600 will be declared and paid in September. h. The cash balance on June 30 is $3,000; the company must maintain a cash balance of at least this amount at the end of each month. i. The company has an agreement with a local bank that allows it to borrow any amount at the beginning of each month, up to a total loan balance of $40,000. 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