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-$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings) June (budget) July budget) 51,800 21,800 January (actual) February (actual) 27,800 31,800 August (budget) September (budget) March (actual) 41,800 29,800 April (budget) 66,800 26,800 May budget) 101,800 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 $4.90 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: 4 of sales Sales commissions Fixed: 290,000 S 27,000 Advertising Rent 124,000 $ 11,500 Salaries Utilities 3,900 Insurance 23,000 Depreciation Insurance is paid on an annual basis, in November of each year. The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 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 83,000 Accounts receivable ($41,700 February sales; $501,600 March sales) 543,300 Inventory 130,928 Prepaid insurance Property and equipment (net) 25,500 1,040,000 1,822,728 Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable 109,000 21,750 Common stock Retained earnings 980,000 711,978 $ 1,822,728 Total liabilities and stockholders' equity The company maintains a minimum cash balance of $59,000. 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 $59,000 in cash. Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash collections, by month and in total. Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales March sales April sales May sales June sales Total cash collections Prepare a master budget for the three-month period ending June 30 that includes a merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost to 2 decimal places.) Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales Total needs Required purchases Unit cost Required dollar purchases Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash disbursements w..iltt ... Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable April purchases May purchases June purchases Total cash payments Prepare a master budget for the three-month period ending June 30 that includes 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 $59,000. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Merchandise purchases Advertising Rent Salaries Commissions Utilities Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance .. Prepare a master budget for the three-month period ending June 30 that includes a budgeted income statement for the three- month period ending June 30. Use the contribution approach. Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Variable expenses: Fixed expenses: Prepare a master budget for the three-month period ending June 30 that includes a budgeted balance sheet as of June 30 Earrings Unlimited Budgeted Balance Sheet June 30 Assets Total assets Liabilities and Stockholders' Equity Total liabilities and stockholders' equity

Answer 1

Solution Requirement 1: Sales budget, by month and in total Sales Budget April May June Quarter Budgeted unit sales Selling price per unit Total sales 66,800 101,800 51,800 220,400 $15 $15 $15 $15 $1,002,000 $1,527,000 $777,000 $3,306,000 Requirement 2 : Schedule of Expected cash collections, by month and in total Earrings Unlimited Schedule of Expected Cash collections April $41,700 $438,900 $200,400 May June Quarter February Sales $41,700 $0 March Sales $62,700 $0 $501,600 April Sales May Sales June Sales $701,400 $100,200 $1,002,000 $305,400 $0 $1,068,900 $1,374,300 $0 $155,400 $155,400 $681,000 $1,069,500 $1,324,500 $3,075,000 Total cash collections Requirement 3 : Merchandise purchase budget in units and in dollars Earrings Unlimited Merchandise Purchase Budget April 66,800 May June Quarter Budgeted Units sales Add: Desired ending inventory Total needs 51,800 101,800 220,400 20,720 40,720 12,720 12,720 107,520 122,520 64,520 233,120 Less: Likely beginning inventory Required purchases Unit cost Required dollar purchases 20,720 26,720 40,720 26,720 43,800 80,800 81,800 206,400 $4.9 $4.9 $4.9 $4.9 $395,920 $400,820 $214,620 $1,011,360

Requirement 4 : Schedule of expected cash disbursements for merchandise purchases, by month and in total Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts Payable April purchases May purchases June purchases Total cash payments $109,000 $0 $109,000 $197,960 $197,960 $0 $395,920 $200,410 $0 $200,410 $400,820 $0 $107,310 $107,310 $307,720 $1,013,050 $306,960 $398,370 Requirement 5 Cash Budget Earrings Unlimited Cash Budget For the Three Months Ending June 30 April $83,000 May June Quarter Beginning cash balance $83,000 $3,075,000 S59,710 $196,760 $1,069,500$1,324,500 Add: Collections from customers $681,000 Total cash available $764,000 $1,129,210 $1,521,260 $3,158,000 Less: Cash disbursements: Merchandise purchases $306,960 $398,370 $307,720 $1,013,050 Advertising $290,000 $290,000 $290,000 $870,000 $27,000 $27,000 $27,000 $81,000 Rent $372,000 Salaries $124,000 $124,000 $124,000 $40,080 $61,080 $31,080 $132,240 Commissions Utilities $11,500 $11,500 $11,500 $34,500 Equipment purchases Dividends paid $0 $20,500 $49,000 $69,500 $21,750 $21,750 $0 $0 Total cash disbursements Excess (deficiency) of cash available over disbursements $840,300 $2,594,040 $821,290 $932,450 ($57,290) $196,760 $680,960 $563,960 Financing: Borrowings Repayments $117,000 $0 $117,000 ($117,000) ($3,510) ($120,510) $0 ($117,000) ($3,510) ($3,510) $560,450 Interest Total financing Ending cash balance $117,000 $0 $59,710 $196,760 $560,450

Requirement 6 : Budgeted Income Statement for the three-month period ending June 30 Earrings Unlimited Budgeted Income Statement For the Three-months Ended June 30 Sales Revenue $3,306,000 Variable expenses: Cost of Goods sold (220,400 units x $4.9) $1,079,960 Sales Commissions ($3,306,000 x 4 %) $132,240 Total Variable expenses $1,212,200 $2,093,800 Contribution Margin Fixed expenses: Advertising $870,000 $81,000 Rent Salaries $372,000 $34,500 $11,700 Utilities Insurance ($3,900 x 3month) Depreciation ($23,000 x 3month) $69,000 Interest expense $3,510 Total Fixed expenses $1,441,710 Net Income $652,090 Requirement 7: Budgeted Balance Sheet as of June 30 Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash $560,450 $774,300 Accounts Receivable Inventory $62,328 Prepaid Insurance ($25,500 $11,700) Property and equipment (net) ($1,040,000+$69,500 Total assets $13,800 $1,040,500 $69,000) $2,451,378 Liabilities and Stockholder's Equity Accounts Payable Dividends Payable $107,310 $21,750 Common stock $980,000 Retained Earnings ($711,978 $652,090 Total liabilities and stockholders' equity $21,750) $1,342,318 + $2,451,378