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:
a. Budgeted monthly income statements for April-July are:
April May June July
Sales $500,000 $800,000 $600,000 $550,000
Cost of goods sold 350,000 560,000 420,000 385,000
Gross margin 150,000 240,000 180,000 165,000
Less operating expenses:
Selling expense 75,000 108,000 79,000 74,000
Administrative expense* 35,000 38,000 37,000 38,000
Total expenses 110,000 146,000 116,000 112,000
Net operating income $ 40,000 $ 94,000 $ 64,000 $ 53,000
*Includes $15,000 depreciation each month.
b. Sales are 25% for cash and 75% on account.
c. Sales on account are collected over a three-month period as follows: 5% collected in the month of sale; 60% collected in the first month following the month of sale; and the remaining 35% collected in the second month following the month of sale. February's sales totaled $400,000, and March's sales totaled $450,000.
d. Inventory purchases are paid for as follows: 40% of a month's inventory purchases are paid for in the month of purchase; the remaining 60% are paid in the following month. Accounts payable at March 31 for inventory purchases during March total $191,100.
e. At the end of each month, inventory must be on hand equal to 10% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $35,000.
f. Dividends of $35,000 will be declared and paid in April.
g. Land costing $12,000 will be purchased for cash in May.
h. The cash balance at March 31 is $36,000; the company must maintain a cash balance of at least $30,000 at all times.
i. The company can borrow from its bank as needed to bolster the Cash account. Borrowings and repayments must be in multiples of $1,000. All borrowings take place at the beginning of a month, and all repayments are made at the end of a month. The annual interest rate is 12%. Compute interest on whole months (1/12, 2/12, and so forth).
Required:
1. Prepare a schedule of expected cash collections from sales for each of the months April, May, and June, and for the quarter in total.
2. Prepare the following for merchandise inventory:
a. An inventory purchases budget for each of the months April, May, and June.
b. A schedule of expected cash disbursements for inventory for each of the months April, May, and June, and for the quarter in total.
3. Prepare a cash budget for the third quarter, by month as well as in total for the quarter. Show borrowings from the company's bank and repayments to the bank as needed to maintain the minimum cash balance.