Question

You have just been hired as a new management trainee by Earnings United, 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 ses many styles of earrings, but all are sold for the same pece-520 per part Actual sales of earrings for the last three months and budgeted sales for the next six months follow in pairs of earrings): January (actual) Tebruary (actual) March (actual) April (budget) May (budget) 23.200 June (budget) 29,200 July (budget) 13,200 August (get) 68,200 September buget) 103,200 53,20 33,200 31,200 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 earnings sold in the following month Suppliers are paid $560 for a pair of earrings. One half of a month's purchases is paid for in the month of purchase the other hair is paid for in the following month As Sales are on credit. Only 20% of a month's sales are collected the month of sale. An additionat 70% sconected in the following month and the remaining 10% is collected in the second month following sale. Bad debts have been negingible Monthly operating expenses for the company are given below Variable: Sales commissions Advertising Rent Solarles Utilities Insurance Depreciation 48 of sales $360,000 $ 34,000 $ 138,000 $ 15,000 $ 30,000 Insurance is paid on an annual basis, in November of each year The company plans to purchase $24,000 in new equipment during May and $56,000 in new equipment during June, both purchases will be for cash. The company declares dividends of $27.000 each quarter, payable in the first month of the following quarter The company's balance sheet as of March 3115 given below. 90,000 749,60 152,753 Assets Cash Accounts receivable (558,409 February sales; 5691,200 March sales) Inventory Prepaid Insurance Property and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings Total liabilities and stockholders' equity 1.110.000 $ 2,131,146 $ 116,000 27,000 1,120,000 868.268 $ 2,131,360 The company maintains a minimum cash balance of $65,000. Al 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 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 $66,000 in cash

Answer 1

Requirement 1-a | Sales Budget Particulars Units Sale price per Unit Sales Revenue April 68,200 20 1,364,000 May 103,200 20 2,064,000 June 53,200 20 1,064,000 Requirement 1-b | Schedule of Expected Cash Collections February Sales 58,400 March Sales 604,800 April Sales 272,800 May Sales June Sales Total Cash Collections 936,000 86,400 954,800 412,800 136,400 1,444,800 212,800 1,794,000 1,454,000 Requirement 1-c | Purchases Budget Expected Sales Add : Desired Ending Inventory Total Needs Less : Beginning Inventory Purchases Price per Unit Purchases Cost 68,200 41,280 109,480 27,280 82,200 5.60 460,320 103,200 21,280 124,480 41,280 83,200 5.60 465,920 53,200 13,280 66,480 21,280 45,200 5.60 253,120 Requirement 1-d Schedule of Expected Cash Disbursements Accounts Payables 116,000 April Purchases 230,160 230,160 May Purchases 232,960 June Purchases 346,160 463,120 232,960 126,560 359,520

Requirement 2 | Cash Budget Earrings Unlimited Cash Budget For the Three Months Ending June 30 Particulars April May June Quarter Beginning Cash Balance $ 90,000 $ 66,280 $ 403,600 $ 90,000 Add : Collections from Customers $ 936,000 $ 1,454,000 $ 1,794,000 $ 4,184,000 Total Cash Available $ 1,026,000 $1,520,280 $2,197,600 $4,274,000 Less : Cash Disbursements Merchandise Purchases $ 346,160 $ 463,120 $ 359,520 $ 1,168,800 Advertising $ 360,000 $ 360,000 $ 360,000 $ 1,080,000 Rent $ 34,000 $ 34,000 $ 34,000 $ 102,000 Salaries $ 138,000 $ 138,000 $ 138,000 $ 414,000 Commissions 54,560 $ 82,560 $ 42,560 $ 179,680 Utilities 15,000 $ 15,000 $ 15,000 $ 45,000 Equipment Purchases $ 24,000 $ 56,000 $ 80,000 Dividends Paid $ 27,000 $ $ $ 27,000 Total Cash Disbursements $ 974,720 $ 1,116,680 $ 1,005,080 $ 3,096,480 Excess (Deficiency) of cash available $ 51,280 $ 403,600 $ 1,192,520 $ 1,177,520 over disbursements Financing : Borrowings 15,000 $ $ 15,000 Repayments $ $ -15,000 $ -15,000 Interest $ $ $ -450 $ -450 Total Financing $ 15,000 $ $ -15,450 $ -450 Ending Cash Balance $ 66,280 $ 403,600 $ 1,177,070 $ 1,177,070

Amount ($) 4,492,000 1,437,440 3,054,560 Requirement 3 | Income Statement Earrings Unlimited Income Statement For the Three Months Ending June 30 Particulars $ Sales Less : Variable Expenses Cost of goods sold 1,257,760 Sales Commissions 179,680 Contribution Margin Less : Fixed Expenses Advertising 1,080,000 Rent 102,000 Salaries 414,000 Utilities 45,000 Insurance 13,800 Depreciation 90,000 Net Operating Income Less : Interest Expense Net Income 1,744,800 1,309,760 450 1,309,310

Requirement 4 Balance Sheet Earrings Unlimited Balance Sheet For the Three Months Ending June 30 Particulars Amount ($) Assets Cash 1,177,070 Accounts Receivables 1,057,600 Inventory 74,368 Prepaid Insurance 15,200 Property, Plant and Equipment 1,100,000 Total Assets 3,424,238 Liabilities and Stockholders' Equity Accounts Payable Dividends Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity 126,560 27,000 1,120,000 2,150,678 3,424,238