The company must maintain a cash balance

Question

Skolt 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, Skolt 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 July-October are as follows:

	July		August		September		October
Sales	$	40,000	$	70,000	$	50,000	$	45,000
Cost of goods sold		24,000		42,000		30,000		27,000
Gross margin		16,000		28,000		20,000		18,000
Selling and administrative expenses:
Selling expense		7,100		11,700		8,600		7,200
Administrative expense*		5,300		7,000		5,900		5,700
Total selling and administrative expenses		12,400		18,700		14,500		12,900
Net operating income	$	3,600	$	9,300	$	5,500	$	5,100

*Includes $1,900 depreciation each month.

b.	Sales are 20% for cash and 80% on credit.
c.	Credit sales are collected over a three-month period with 15% collected in the month of sale, 65% in the month following sale, and 20% in the second month following sale. May sales totaled $26,000, and June sales totaled $32,000.
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 $10,080.
e.	The company maintains its ending inventory levels at 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $4,800.
f.	Land costing $4,100 will be purchased in July.
g.	Dividends of $1,400 will be declared and paid in September.
h.	The cash balance on June 30 is $8,300; 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 in increments of $1,000 at the beginning of each month, up to a total loan balance of $44,000. 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 company's 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 July, August, and September are collected over a three-month period with 25% collected in the month of sale, 55% collected in the month following sale, and 20% in the second month following sale. Credit sales from May and June are collected during the third quarter using the collection percentages specified in the main section.

2.

The company maintains its ending inventory levels for July, August, and September at 20% of the cost of merchandise to be sold in the following month. The merchandise inventory at June 30 remains $4,800 and accounts payable for inventory purchases at June 30 remains $10,080.

Required:
1.	Using the president's new assumptions in (1) above, prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.)

Schedule of Expected Cash Collections
	July	August	September	Quarter
Cash sales	$	$	$	$
Credit sales:
May
June
July
August
September
Total cash collections	$	$	$	$

2.	Using the president's new assumptions in (2) above, prepare the following for merchandise inventory:

a.	A merchandise purchases budget for July, August, and September. (Input all amounts as positive values. Do not round intermediate calculations.)

Merchandise Purchases Budget
	July	August	September
Budgeted cost of goods sold	$	$	$
:
Total needs
:
Required inventory purchases	$	$	$

b.	A schedule of expected cash disbursements for merchandise purchases for July, August, and September and for the quarter in total. (Leave no cells blank - be certain to enter "0" wherever required.)

Schedule of Expected Cash Disbursements
	July	August	September	Quarter
Accounts payable, June 30	$	$	$	$
July purchases
August purchases
September purchases
Total cash disbursements	$	$	$	$

3.

Using the president's new assumptions, prepare a cash budget for July, August, September, and for the quarter in total. (Input all amounts as positive values except cash deficiency, repayments and interest which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Total Financing should be indicated with a minus sign when the company is repaying amounts that were previously borrowed.)

Skolt Products, Inc. Cash Budget For the Quarter Ended September 30
	July	August	September	Quarter
Cash balance, beginning	$	$	$	$
Add collections from sales
Total cash available
Less disbursements:
For inventory purchases
For selling expenses
For administrative expenses
For land
For dividends
Total disbursements
Excess (deficiency) of cash available over disbursements
Financing:
Borrowings
Repayment
Interest
Total financing
Cash balance, ending	$	$	$	$