Question

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls 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-$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): 22,400 28,400 42,400 67,400 102,400 June (budget) July (budget) August (budget) September (budget) 52,400 32,400 30,400 27,400 January (actual) February (actual) March (actual) April (budget) May (budget) 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 earrings sold in the following month. Suppliers are paid $5.20 for a pair of earrings. 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. 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:

Answer 1

ANSWER

1) Preparing the Master Budget for the three month period ending June 30:

a) Preparing the Sales Budget:

Earnings Unlimited Sales Budget
	April	May	June	Quarter
Budgeted Unit Sales	67,400	102,400	52,400	222,200
Selling price per unit	*$16	*$16	*$16	*$16
Total Sales	$1,078,400	$1,638,400	$838,400	$3,555,200

b) Preparing the schedule of expected cash collections from sales, by month and in total:

Earnings Unlimited Schedule of Expected Cash Collections
	April	May	June	Quarter
February sales (10%)	$28,400			$28,400
March sales (70%, 10%)	472,880	$67,840		540,720
April sales (20%, 70%, 10%)	215,680	754,880	$107,840	1,078,400
May sales (20%, 70%)		327,680	1,146,880	1,474,560
June sales (20%)			167,680	167,680
Total cash collections	$716,960	$1,150,400	$1,422,400	$3,289,760

c) Preparing the merchandise purchases budget in units and in dollars. Show the budget by month and in total:

Earnings Unlimited Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted Unit Sales	67,400	102,400	52,400	222,200
Add desired ending inventory*	40,960	20,960	12,960	12,960
Total needs	108,360	123,360	65,360	235,160
Less beginning inventory	26,960	40,960	20,960	26,960
Required purchases	81,400	82,400	44,400	208,200
Cost of purchases at $5.2 per unit	$423,280	$428,480	$230,880	$1,082,640

*40% of the next month’s unit sales.

d) Preparing the schedule of expected cash disbursements for merchandise purchases, by month and in total:

Earnings Unlimited Budgeted Cash Disbursements for Merchandise Purchases For Three Months Ending June 30
	April	May	June	Quarter
Accounts Payable	$112,000			$112,000
April Purchases	211,640	211,640		$423,280
May Purchases		214,240	214,240	$428,480
June Purchases			115,440	$115,440
Total Cash Payments	$323,640	$425,880	$329,680	$1,079,200

2) Preparing the cash budget. Show the budget by month and in total:

Earnings Unlimited Cash Budget For Three Months Ending June 30
	April	May	Junne	Quarter
Beginning Cash Balance	$86,000	$62,000	$204,555.84	$86,000
Add Collections from customers	716,960	1,150,400	1,422,400	3,289,760
Total Cash Available	802,960	1,212,400	1,626,955.84	3,375,760
Less: Cash Disbursements:
Merchandise purchases	$323,640	$425,880	$329,680	$1,079,200
Advertising	320,000	320,000	320,000	960,000
Rent	30,000	30,000	30,000	90,000
Salaries	130,000	130,000	130,000	390,000
Commissions	43,136	65,536	33,536	142,208
Utilities	13,000	13,000	13,000	39,000
Equipment Purchases	-	22,000	52,000	74,000
Dividends Paid	24,000	-	-	24,000
Total Disbursements	$883,776	$1,006,416	$908,216	$2,798,408
Excess (deficiency) of receipts over disbursements	(80,816)	205,984	718,739.84	577,352
Financing:
Borrowings	142,816	-	-	142,816
Repayments	-	-	(142,816)	(142,816)
Interest	-	(1,428.16)	(1,428.16)	(1,428.16)
Total financing	$142,816	$1,428.16	($144,244.16)	-
Cash balance, ending	$62,000	$204,555.84	$574,495.68	$574,495.68

THANK YOU FOR THE QUESTION...KINDLY RATE....IT HELPS ME A LOT