Scott Products Inc. is a merchandising company that sells binders, paper, and other school supplies. The company is planning its cash needs for the third quarter. In the past, Scott Products has had to borrow money during the third quarter to support peak sales of back- to-school materials, which occur during August. The following information has been assembled to assist in preparing a cash budget for the quarter: a. Budgeted monthly absorption costing income statements for for July through October are as follows: Sales Cost of goods sold July $40,000 24,000 August $70,000 42,000 September $50,000 30,000 October $45,000 27,000 Gross margin 16,000 28,000 20,000 18,000 Selling and administrative expenses: Selling expense Administrative expense* 7,200 5, 600 11, 700 7, 200 8,500 6, 100 7, 300 5, 900 Tot al expenses 12, 800 18,900 1 4, 600 13,200 Operating income $ 3,200 $ 9, 100 $ 5,400 $ 4,800 * Includes $2,000 depreciation each month. b. Sales are 20% for cash and 80% on credit. c. Credit sales are collected over a three-month period, with 10% collected in the month of sale, 70% in the month following sale, and 20% in the second month following sale. May sales totalled $30,000, and June sales totalled $36,000. 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% is paid in the following month. Accounts payable for inventory purchases at June 30 total $11,700. e. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $18,000. f. Land costing $4,500 will be purchased in July g. Dividends of $1,000 will be declared and paid in September h. The cash balance on June 30 is $8,000; 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 the company to borrow up to a total loan balance of $40,000. The interest rate on these loans is 1% per month. All borrowing is done at the beginning of a month. The company would, as far as it is able, repay the loan at the end of each month. Interest must be paid at the end of each month based on the outstanding loans for that month. There are no loans outstanding as at June 30. Required: 1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. July August September Quarter Collections on sales: Cash sales Sales on account: May June July August September Total cash collections 2. Prepare the following for merchandise inventory: a. A merchandise purchases budget for July, August, and September. Merchandise Purchases Budget July August Budgeted cost of goods sold September October Total needs eBook Required inventory purchases ferences b. A schedule of expected cash disbursements for merchandise purchases for July, August, and September and for the quarter in total. July August September Quarter Accounts payable, June 30 July purchases August purchases September purchases Total cash collections