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.

January (actual)	22,000	June (budget)	52,000
February (actual)	28,000	July (budget)	32,000
March (actual)	42,000	August (budget)	30,000
April (budget)	67,000	September (budget)	27,000
May (budget)	102,000

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):

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 $5.00 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:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	300,000
Rent	$	28,000
Salaries	$	126,000
Utilities	$	12,000
Insurance	$	4,000
Depreciation	$	24,000

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

The company plans to purchase $21,000 in new equipment during May and $50,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $22,500 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets
Cash	$	84,000
Accounts receivable ($44,800 February sales; $537,600 March sales)		582,400
Inventory		134,000
Prepaid insurance		26,000
Property and equipment (net)		1,050,000
Total assets	$	1,876,400
Liabilities and Stockholders’ Equity
Accounts payable	$	110,000
Dividends payable		22,500
Common stock		1,000,000
Retained earnings		743,900
Total liabilities and stockholders’ equity	$	1,876,400

The company maintains a minimum cash balance of $60,000. 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 in increments of $1,000 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 would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $60,000 in cash.

Required:

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

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

    b. A schedule of expected cash collections, 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 $60,000.

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30.

Answer 1

A C D E F G HI 1 Sales Budget April 67000 May 102000 3 4 5 June 52000 16 832000 Units sold S.P Sales I Quarter 221000 16 3536000 16 16 1072000 1632000 8 June Corresponding Calculations Schedule of Expected Cash Collections April May Coll. From Feb Sales Op. Balance shhet Coll. From march Sales 537600 . 70/80 537600 • 10 / 80 Coll. Form April sales 1072000 • 20 % 1072000 70 % Coll. From MAy sales 1632000 20% Coll. From June sales 1072000 - 10% 1632000 . 70 % 832000 • 20% Add:- Desired ending FG Units 102000 * 40 % 52000 * 40 % 32000 * 40 % Schedule of Expected Cash Collections April May June Quarter 9 Coll. From Feb Sales 44.800 44800 e 10 Coll. From march Sales 4,70,400 67200 537600 11 Coll. Form April sales 2,14,400 7,50,400 1,07,200 1072000 12 Coll. From MAy sales 3,26,400 11,42,400 1468800 13 Coll. From June sales 1,66,400 166400 14 Total Cash Collections 7,29,600 11,44,000 14,16,000 32,89,600 15 16 Production Budget 17 18 April May June Quarter 19 Expected Unit Sales 67000 102000 52000 221000 20 Add:- Desired ending FG Units 40,800 20,800 12,800 12,800 - 21 Total Reqd. Units 107800 122800 64800 233800 22 Less:- Beginning FG Units 26,800 40,800 20,800 26,800 23 Regd. prod. Units 81000 82000 44000 207000 24 C.P 25 Purchases 405000 410000 220000 1035000 26 2 27 Schedule of Expected Cash Disbursements 28 April May June Quarter 29 March Purchases 1.10,000 1,10,000 30 April Purchases 202500 202500 405000 31 May Purchase 205000 205000 410000 32 June Purchases 110000 110000 33 Total Cash Disbursement for Purchases 3,12,500 4,07,500 3,15,000 10,35,000 34 Less:- Beginning FG Units 134000/5

DE Cash Budget April May 84,000 60,720 7,29,600 11,44,000 8.13,600 12.04,720 June Quarter 2,44,940 84,000 14,16,000 32,89,600 16.60.940 33,73,600 35 + 36 37 Cash Balance Beginning II 38 Add Cash Collections 39 Total Cash Available 40 Less Cash Disburtments: al 41 Inventory Purchases 42 Advertising 43 Rent 44 Salaries 45 Commissions E 46 Utilities t 47 Equipment purchases 48 Dividends paid 49 Total Cash Disbursement 50 Excess (deficiency) of cash 51 Financing: Borrowings 53 Repayments Interest (91,000* 1% * 3) 55 Total Financing 56 Cash Balance, Ending 3,12,500 3,00,000 28,000 1,26,000 42,880 12,000 4,07,500 3,00,000 28,000 1,26,000 65,280 12,000 21,000 3,15,000 3,00,000 28,000 1,26,000 33,280 12,000 50,000 10,35,000 9,00,000 84,000 3,78,000 1,41,440 36,000 71,000 22,500 26,67,940 7,05,660 22,500 8,43,889 -30,280 9,59,780 2,44,940 8,64,280 7,96,660 52 91000 54 91000 2730 93,730 7.02.930 91000 -91000 -2730 -2730 7.02.930 0 91000 60.720 2.44 940 57

А 58 Earrings Unlimited 59 Income Statement 60 For the Quarter Ended June 30 61 35,36,000 11,05,000 1.41.440 (134000 + 1035000 - 64000) 12.46,440 Formula applied :- COGS - Opening Inventory+ 22,89,560 Purchases - Closing Inventory Closing inventory = 12800 * 5 = 64000 62 Sales 63 Variable Expenses:- 64 Inventory purchases 65 commissions 66 Contribution margin 67 Fised Expenses :- 68 Advertising 69 Rent 70 Salaries 71 Utilities 72 Depreciation ( 24000 * 3) 73 Insurance ( 4000 * 3) 74 Net Operating Income 75 Interest Expenses (Part 4) 76 Net Income 9,00.000 84,000 3,78,000 36,000 72,000 12,000 14,82,000 8,07,560 2,730 8,04,830

C D 7,02,930 8,28,800 (1632000 10% + 832000 * 80% ) 64,000 Closing inventory = 12800 * 5 = 64000 14,000 (26000 - 12000) 16,09,730 A 78 Balance Sheet 79 Assets 80 Current Assets: 81 Cash 82 Accounts Receivable 83 Inventory 84 Prepaid insurance 85 Total Current Assets 86 Buildings and Equipment, Net 87 1050000 + 71000 - 72000 88 Total Assets 89 90 Liabilities and Equity 91 Current Liabilities 92 Accounts Payable 93 StockHolder's Equity: 94 Capital Stock 95 Retained Earnings ( 743900 + 804830) 96 Total Liabilities and Equity 97 10,49,000 26,58,730 110000 1000000 15,48,730 25,48,730 26,58,730

Sales Budget May Quarter 67000 102000 52000 =B3+C3+D3 3 4 5 Units sold S.P Sales 16 16 =B3 B4 =C3*C4 =D3 D4 =E3 E4 Schedule of Expected Cash Collections May April June 44800 470400 =B5*0.2 67200 =B5*0.7 C5*0.2 =B5*0.1 C5*0.7 =D5*0.2 D9+D10+D11+D12+D13 Quarter =B9+C9+D9 =B10+C10+D10 =B1l+C1l+DII =B12-C12+D12 =B13+C13+D13 E9+E10+E11+E12+E13 B9+B10+B11+B12+B13 C9+C10+C11+C12+C13 Production Budget May Quarter 9 Coll. From Feb Sales 10 Coll. From march Sales 11 Coll. Form April sales 12 Coll. From MAy sales 13 Coll. From June sales 14 Total Cash Collections 15 16 17 18 19 Expected Unit Sales 20 Add:- Desired ending FG Units 21 Total Regd. Units 22 Less:- Beginning FG Units 23 Reqd. prod. Units 24 C.P 25 Purchases 26 27 28 29 March Purchases 30 April Purchases 31 May Purchase 32 June Purchases 133 Total Cash Disbursement for Purchases =B3 =C19*0.4 =B19+B20 26800 =B21-B22 =C3 =D19*0.4 =C19+020 =B20 =C21-C22 =D3 12800 =D19+D20 =C20 =D21-D22 =B19+C19+D19 =D20 =E19+E20 =B22 =E21-E22 =B23*B24 =C23*C24 =D23*D24 =E23*E24 Schedule of Expected Cash Disbursements May June April 110000 =B25*0.5 =B25*0.5 =C25*0.5 Quarter -B29 =B30+C30+D30 =B31+C31+D31 =B32+C32+D32 =E29+E30+E31+E32 =C25*0.5 =D25+0.5 D29+D30+D31+D32 B29+B30+B31+B32 C29+C30+C31+C32 24

Cash Budget June =C56 April 84000 =B14 =B37+B38 May =B56 =C14 =C37+C38 Quarter =B37 =E14 =E37+E38 = 14 =D37+D38 37 Cash Balance Beginning 38 Add Cash Collections 39 Total Cash Available 40 Less Cash Disburtments: 141 Inventory Purchases 42 Advertising 43 Rent 44 Salaries 45 Commissions 46 Utilities 47 Equipment purchases 48 Dividends paid 49 Total Cash Disbursement 50 Excess (deficiency) of cash 51 Financing: 52 Borrowings 53 Repayments 54 Interest (91,000* 1% * 3) 55 Total Financing 56 Cash Balance, Ending 57 =B33 =C33 =D33 300000 300000 300000 28000 28000 28000 126000 126000 126000 =B5*0.04 5*0.04 =D5*0.04 12000 12000 12000 21000 50000 22500 =B41+B42+B43+B44+B45+B46+B47+B48=C41+C42+G43+C44+C45+C46+C47+C48D41+D42+D43+D44+D45+D46+D47+D48 =B39-B49 =C39-C49 =D39-D49 =E33 =B42+C42+D42 =B43+C43+D43 =B44+C44+D44 =B45+C45+D45 =B46+C46+D46 =B47+C47+D47 =B48+C48+D48 =E41+E42+43+E44+E45+E46+E47+E48 =E39-E49 91000 91000 2730 =D53+DS4 =D50-155 =B52+C52+D52 =-D53 =-D54 =E52+E53+E54 =E50+E52+E53+E54 =B52 =B52 BSO +C53+C54 =C50-C55

D 58 Earrings Unlimited 59 Income Statement 60 For the Quarter Ended June 30 61 -E5 1105000 =E45 =B64+B65 =C62-C65 ( 134000 + 1035000 - 64000) Formula applied - COGS = Opening Inventory+ Purchases - Closing Inventory Closing inventory = 12800 * 5 = 64000 62 Sales 63 Variable Expenses:- nenses: 64 Inventory purchases 65 commissions 66 Contribution margin 67 Fised Expenses :- 68 Advertising 69 Rent 70 Salaries 71 Utilities 72 Depreciation ( 24000 * 3) 73 Insurance ( 4000 * 3) 74 Net Operating Income Interest Expenses (Part 4) 76 Net Income =E42 -E43 -E44 =E46 72000 12000 =B68+B69+B70+B71+B72+B73 =C66-C73 2730 C74-C75

=D56 828800 64000 14000 =C81+C82+C83+C84 A 77 78 Balance Sheet 79 Assets 80 Current Assets: 81 Cash 82 Accounts Receivable 83 Inventory 84 Prepaid insurance 85 Total Current Assets 86 Buildings and Equipment, Net 87 1050000 + 71000 - 72000 88 Total Assets 89 90 Liabilities and Equity 91 Current Liabilities 92 | Accounts Payable 93 StockHolder's Equity: 94 Capital Stock 95 Retained Earnings ( 743900 + 804830) 96 Total Liabilities and Equity 1049000 -C85+C87 -D32 1000000 =C76+743900 =B94+B95 C92+C95 97 98