Question

You have just been contracted as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price - $10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow:

January (actual)	20,000
February (actual)	26,000
March (actual)	40,000
April (budget)	65,000
May (budget)	100,000
June (budget)	50,000
July (budget)	30,000
August (budget)	28,000
September (budget)	25,000

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the bracelets sold in the following month.

Suppliers are paid $4 for each bracelet. One-half of a month's purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit with no discounts. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable expenses:

Sales commissions                      4% of sales

Fixed expenses:

Advertising                                   $200,000

Rent                                            $18,000

Salaries                                         $106,000

Utilities                                              $ 7,000

Insurance                                           $3,000

Depreciation                                     $14,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.

Other relevant data is given below:

Cash balance as of March 31                 $74,000

Inventory balance as of March 31             $104,000

Merchandise purchases for March            $200,000

The company maintains a minimum cash balance of at least $50,000 at the end of each month. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow the exact amount needed at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company will pay the bank all of the accrued interest on the loan and as much of the loan as possible while still retaining at least $50,000 in cash.

Required:

Prepare a cash budget for the three-month period ending June 30. Include the following detailed budgets:

1.

a. A sales budget, by month and in total.

b. A schedule of expected cash collections from sales, by month and in total.

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.

Answer 1

Answer with working notes is given below

1.a. Sales Budget Budgeted Unit sales Selling price per unit Total Sales April 65,000 $10 $650,000 May 100,000 $10 $1,000,000 June Quarter 50,000 215,000 $100 $10 $500,000 $2,150,000 b. Schedule of Cash collected from Customers April $650,000 May $1,000,000 June Quarter $500,000 $2,150,000 Sales Collection February sale-( 26,000 X $10)*10% March Sale - Total Sales $ 400,000 April Sales May Sales June Sales Total Cash Collections $26,000 $280,000 $130,000 $40,000 $455,000 $200,000 $26,000 $320,000 $65,000 $650,000 $700,000 $900,000 $100,000 $100,000 $865,000 $1,996,000 $436,000 $695,000 c. Purchase Budget July 30,000 Budgeted Unit Sales Add: Closing stock ( 40% of sale of following month) Total Needs Less Opening Stock Required Purchase (Units) Unit Cost Purchase value budget April 65,000 40,000 105,000 26,000 79,000 $4.00 $316,000 May 100,000 20,000 120,000 40,000 80,000 $4.00 $320,000 June 50,000 12,000 62,000 20,000 42,000 $4.00 $168,000 Quarter 215,000 12,000 227,000 26,000 201,000 $4.00 $804,000| Opening stock for April- ($104,000/S4)- 26,000 units d. Schedule of Cash payment for purchases April $316,000 May $320,000 June $168,000 Quarter $804,000 Purchases Payment Accounts Payable-50% of $200,000 April Purchase May Purchase June Purchase Total Cash Payments $100,000 $158,000 $158,000 $160,000 $160,000 $84,000 $244,000 $100,000 $316,000 $320,000 $84,000 $820,000 $258,000 $318,000 Earrings Unlimited Cash Budget For the Three months Ended June 30 April $74,000 May $50,000 June $50,000 Quarter $74,000 Opening Balance of Cash Receipt of Cash Collection from Customers Cash available for disbursement $436,000 $510,000 $695,000 $745,000 $865,000 $1,996,000 $915,000 $2,070,000 $258,000 $200,000 $18,000 $106,000 $26,000 $7,000 $318,000 $200,000 $18,000 $106,000 $40,000 $7,000 $16,000 Merchandise purchase Advertising Rent Salaries Sales Commission - 4% of Sales Utilities Equipment purchase Dividends paid Cash paid for disbursements Net Cash available Financing Borrowings (at the beginning of the month) Repayments at the end of quarter) Interest (at 1% per month) Total financing Closing cash balance $244,000 $820,000 $200,000 $600,000 $18,000 $54,000 $106,000 $318,000 $20,000 $86,000 $7,000 $21,000 $40,000 $56,000 $15,000 $635,000 $1,970,000 $280,000 $100,000 $15,000 $630,000 -$120,000 $705,000 $40,000 $170,000 $10,000 $180,000 $180,000 $5,500 $5,500 $94,500 $170,000 $50,000 -$180,000 -$5,500 $185,500 $94,500 $10,000 $50,000 Interest on short term borrowing @ 1% Month Borrowing interest April $170,000 $5,100 Interest for 3 month May $10,000 $200 Interest for 2 month $5,500