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Homework answers / question archive / "GrowMaster Products, a rapidly growing distributor of home gardening equipment, is formulating its plans for the coming year

"GrowMaster Products, a rapidly growing distributor of home gardening equipment, is formulating its plans for the coming year

Accounting

"GrowMaster Products, a rapidly growing distributor of home gardening equipment, is formulating its plans for the coming year. Carol Jones, the firm’s marketing director, has completed the following sales forecast." Month Sales Month Sales January $900,000 July $1,150,000 February $1,000,000 August $1,500,000 March $900,000 September $1,600,000 April $1,100,000 October $1,600,000 May $850,000 November $1,500,000 June $950,000 December $1,700,000 • Phillip Smith, an accountant in the Planning and Budgeting Department, is responsible for preparing the cash flow projection. He has gathered the following information. • All sales are made on credit. • GrowMaster’s excellent record in accounts receivable collection is expected to continue, with 60% of sales collected in the month after sale and the remaining 40 percent collected two months after the sale. • Inventory purchased in the months of April, May and June are $495,000, $382,500 and $427,500 respectively. • All purchases are made on account. Historically, 75% of accounts payable have been paid during the month of purchase, and the remaining 25% in the month following purchase. • Hourly wages and fringe benefits, estimated at 30% of the current month’s sales, are paid in the month incurred. • General and administrative expenses are projected to be $1,473,000 for the year. A breakdown of the expenses follows. All expenditures are paid monthly throughout the year, with the exception of property taxes, which are paid in four equal installments at the end of each quarter. (divide each expense by 12 to get the monthly expenditure, except property taxes which should be divided by 4 to get quarterly taxes). Salaries and fringe benefits $315,000 Advertising 360,000 Property Taxes 80,000 Insurance 192,000 Utilities 180,000 Depreciation 346,000 Total $1,473,000 • GrowMaster maintains a minimum cash balance of $50,000. If the cash balance is less than $50,000 at the end of the month, the company borrows against its 12% line of credit in order to maintain the balance. All borrowings are made at the beginning of the month, and all repayments are made at the end of the month (in increments of $1,000). Accrued interest is paid in full with each principal repayment. The projected cash balance on April 1 is $50,000.

Required: solve above question with steps (better in hand writing)

1. Prepare the cash receipts budget for the second quarter.

2. Prepare the cash payments budget for the second quarter.

3. Prepare the cash budget for the second quarter.

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Ans.1.

Cash receipts budget for Second Quarter

April

May

June

60% cash collection of previous month's sale

$540,000

$660,000

$510,000

40% cash collection of the month before last month's sale

$400,000

$360,000

$440,000

Total estimated cash receipts in each month

$940,000

$1,020,000

$950,000

Working notes:

All sales are on credit. Further, 60% of sales in any month is collected in the next month and balance 40% of sales is collected in the month following next month. So, for example, 60% of February sales will be collected in March and 40% of February sales will be collected in April. Similarly, 60% of March sales will be collected in April and 40% of March sales will be collected in May.

The sales for relevant months and expected cash collections in the following months are presented in the table below:

 

February

March

April

May

June

Sales

$1,000,000

$900,000

$1,100,000

$850,000

$950,000

60% collection in the next month

 

$600,000

$540,000

$660,000

$510,000

40% collection in the month following next month

   

$400,000

$360,000

$440,000

So, for April 40% of $1,000,000 + 60%*$900,000 = $940,000 is the total cash collection. Similarly, for other months.

Ans.2.

Cash payments budget for Second Quarter

April

May

June

75% of accounts payable paid in same month

$371,250

$286,875

$320,625

25% of accounts payable paid in following month

 

$123,750

$95,625

Wages and fringe benefits (30% of sales)

$330,000

$255,000

$285,000

Salaries and fringe benefits payment

$26,250

$26,250

$26,250

Advertising paymen

$30,000

$30,000

$30,000

Property taxes payment

   

$20,000

Insurance payment

$16,000

$16,000

$16,000

Utilities payment

$15,000

$15,000

$15,000

Total estimated cash payments in each month

$788,500

$752,875

$808,500

Working notes:

1. Inventory purchases are paid for 75% in the same month and 25% in the following month.

So, the calculations for same are presented below:

 

April

May

June

Inventory purchases on credit in each month

$495,000

$382,500

$427,500

75% of accounts payable paid in same month

$371,250

$286,875

$320,625

25% of accounts payable paid in following month

 

$123,750

$95,625

2. Wages & fringe benefits payment is 30% of that month’s sale. So, for April, it is 30%*$1,100,000, for May it is 30%*$850,000 and for June it is 30%*$950,000.

3. Salaries & Fringe benefits payment in each month = $315,000/12 = $26,250

4. Advertising expenses in each month = $360,000/12 = $30,000

5. Property tax payment at end of second quarter,i.e., in June = $80,000/4 = $20,000

6. Insurance payment in each month = $192,000/12 = $16,000

7. Utilities payment in each month = $180,000/12 = $15,000

8. Depreciation is a non-cash expense, hence it is not included in cash payments budget.

Ans.3.

Cash budget for Second Quarter

April

May

June

Opening balance of cash

$50,000

$201,500

$468,625

       

Cash Receipts:

     

60% cash collection of previous month's sale

$540,000

$660,000

$510,000

40% cash collection of the month before last month's sale

$400,000

$360,000

$440,000

Total estimated cash receipts in each month

$940,000

$1,020,000

$950,000

       

Cash Payments:

     

75% of accounts payable paid in same month

$371,250

$286,875

$320,625

25% of accounts payable paid in following month

 

$123,750

$95,625

Wages and fringe benefits (30% of sales)

$330,000

$255,000

$285,000

Salaries and fringe benefits payment

$26,250

$26,250

$26,250

Advertising paymen

$30,000

$30,000

$30,000

Property taxes payment

   

$20,000

Insurance payment

$16,000

$16,000

$16,000

Utilities payment

$15,000

$15,000

$15,000

Total estimated cash payments in each month

$788,500

$752,875

$808,500

       

Excess (deficit) of cash

$201,500

$468,625

$610,125

       

Borrowings required

-

-

-

Interest on borrowings @12%

-

-

-

       

Cash balance at the end of the month

$201,500

$468,625

$610,125

Working notes:

1. Opening balance of cash at April 1 is given as $50,000.

2. Estimated cash receipts and cash payments for each month are taken from cash receipts budget and cash payment budget.

3. Excess(deficit) of cash = Opening balance of cash + Cash receipts during the month – Cash payments during the month

4. Borrowing is required only if cash balance is less than $50,000 (Which is not the case in any of the months, so no borrowing required).

5. Closing balance of cash of one month = Opening balance of cash of next month

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