Question

Admire is a retail company that sells specialized gardening products. The company is considering opening a new store on October 1, Year1. As budget coordinator, you have been asked to prepare a master budget for the first 3 months of the company’s operation. You have gathered the following information:

October sales are estimated to be $300000 of which 45 percent will be cash and the remainder will be on credit. The company expects all sales to increase at the rate of 20 percent per month for November and December. Sales in January Year 2 are expected to be $250000.

The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale.

Prepare a sales budget and a schedule of cash receipts using these facts and your excel template. Check your answers here before moving to the next part, by completing the cells requested in the chart below.

a. Sales Budget	October	November	December	Total-Qtr
Cash sales
Sales on account
Total budgeted sales

b. Schedule of Cash Receipts	October	November	December	Total-Qtr
Current cash sales
Plus collections from A/R
Total collections

The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month’s cost of goods sold. (Ending inventory for December is based on budgeted January Year2 sales.)

Assume that all inventory purchases are made on account (on credit). The company pays 80 percent of accounts payable in the month of purchase and the remaining amount in the following month.

In excel, prepare an inventory purchases budget and a cash payments budget for inventory purchases. Use the check figures below before you continue.

c. Inventory Purchases Budget	October	November	December	Total-Qtr
Budgeted cost of goods sold
Plus desired ending inventory
Inventory needed
Less beginning inventory
Required purchases (on account)

d. Cash payments for inventory	October	November	December	Total-Qtr
Payment of current month's A/P
Payment for prior month's A/P
Total budgeted payments

Budgeted selling and administrative expenses per month follow.

• Salary expense (fixed): $ 28200
• Sales commissions:  5 percent of Sales
• Supplies expense:   2 percent of Sales
• Utilities (fixed): $2600              
• Depreciation on store equipment (fixed)*:   You compute    
• Rent (fixed) $ 11000          
• Miscellaneous (fixed): $ 3500      

*The capital expenditures budget indicates that the company will spend $182400 on October 1 for store fixtures, which are expected to have a $24000 residual value and a 36 month useful life.

Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred.

In excel, prepare the selling and administrative expenses budget and the cash payments budget for selling and administrative expenses. Check the key figures below.

e. Selling and Admin.Expense Budget	October	November	December	Total-Qtr
Salary expense
Sales commissions
Supplies expense
Utilities
Depreciation on store fixtures
Rent
Miscellaneous
Total S&A expenses

f. Cash payments for S&A	October	November	December	Total-Qtr
Salary expense
Sales commissions
Supplies expense
Utilities
Depreciation on store fixtures
Rent
Miscellaneous
Total payments for S&A expenses

Admire issued common stock for $50000 on October 5.

A dividend of $28000 was paid on December 15.

The company borrows and repays funds in increments of $1,000 on the last day of the month. The company also pays its vendors on the last day of the month. It pays interest of 1 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $16000 cash cushion.   

Prepare a cash budget on your excel template. Check key figure below.

g. Cash Budget	October	November	December	Total-Qtr
Beginning cash balance
Issuance of stock
Collections from customers
Cash available
Less payments
For inventory purchases
For S&A expenses
Purchase of store fixtures
Pay dividend
Interest expense
Total budgeted payments
Cash balance before borrow/repay
Financing activity
Borrowing (repayment)
Ending cash balance

Income statement

Input expenses as negatives. Use a minus sign in front of the number.

Sales revenue
Cost of goods sold
Gross margin
S&A expenses
Operating income
Interest expense
Net income

Balance Sheet

Enter any contra-assets as negative numbers. Use a minus sign.

Assets
Cash
Accounts receivable
Inventory
Store fixtures
Accumulated depreciation
Total assets
Liabilities
Accounts payable
Utilities payable
Sales commissions payable
Line of credit liability
Total liabilities
Equity
Common stock
Retained earnings
Total equity
Total liabilities and equity

Answer 1

a. Sales Budget	October	November	December	Total Qtr
Cash sales	1,35,000.00	1,62,000.00	1,94,400.00	4,91,400.00
Sales on account (45% of total sales)	1,65,000.00	1,98,000.00	2,37,600.00	6,00,600.00
Total Budgeted Sales	3,00,000.00	3,60,000.00	4,32,000.00	10,92,000.00

Sales for October given = $300000

Sales for November to increase by 20% = 300000+300000 X 20% = $360000

Sales for December to increase by 20% = 360000 + 360000 X 20% =$432000

b. Schedule of cash receipts	October	November	December	Total Qtr
Current cash sales	1,35,000.00	1,62,000.00	1,94,400.00	4,91,400.00
Plus: collection from A/R( Previous month credit sales)	-	1,65,000.00	1,98,000.00	3,63,000.00
Total Collections	1,35,000.00	3,27,000.00	3,92,400.00	8,54,400.00

c. Inventor Purchases budget	October	November	December	Total Qtr
Budgeted cost of goods sold(60% of sales)	1,80,000.00	2,16,000.00	2,59,200.00	6,55,200.00
Plus desired ending inventory(10% of next months COGS)	21,600.00	25,920.00	15,000.00	62,520.00
Inventory needed	2,01,600.00	2,41,920.00	2,74,200.00	7,17,720.00
Less beginning inventory	0	21,600.00	25,920.00	47,520.00
Required purchases (on account)	2,01,600.00	2,20,320.00	2,48,280.00	6,70,200.00

d. Cash payments for inventory	October	November	December	Total Qtr
Payment of current month's A/P (80%)	1,61,280.00	1,76,256.00	1,98,624.00	5,36,160.00
Payment for prior month's A/P	0	40,320.00	44,064.00	84,384.00
Total budgeted payments	1,61,280.00	2,16,576.00	2,42,688.00	6,20,544.00

e. Selling and Admin.Expense Budget	October	November	December	Total Qtr
Salary expense	28200	28200	28200	84600
Sales commissions	15,000.00	18,000.00	21,600.00	54600
Supplies expense	6,000.00	7,200.00	8,640.00	21840
Utilities	2600	2600	2600	7800
Depreciation on store fixtures	4400	4400	4400	13200
rent	11000	11000	11000	33000
Miscellaneous	3500	3500	3500	10500
total S&A expenses	70700	74900	79940	225540

Depreciation	=(182400-24000)/36
	4400

f. Cash payments for S&A	October	November	December	Total Qtr
Salary expense	28200	28200	28200	84600
Sales commissions	0	15,000.00	18,000.00	33000
Supplies expense	6000	7200	8640	21840
Utilities	0	2600	2600	5200
Depreciation on store fixtures	0	0	0	0
rent	11000	11000	11000	33000
Miscellaneous	3500	3500	3500	10500
total payments for S&A expenses	48700	67500	71940	188140

g. Cash Budget	October	November	December	Total Qtr
Beginning cash balance	0	16620	16357	32977
Issuance of stock	50000	0	0	50000
Collections from customers	1,35,000	3,27,000	3,92,400	854400
Cash available	185000	343620	408757.333	937377
Less payments				0
For inventory purchases	1,61,280.00	2,16,576.00	2,42,688.00	620544
For S&A expenses	48700	67500	71940	188140
Purchase of store fixtures	182400	0	0	182400
Pay dividend	0	0	28000	28000
Interest expense	0	187	151	338
Total budgeted payments	3,92,380	2,84,263	3,42,779	1019422
Cash balance before borrow/repay	-2,07,380	59,357	65,979	-82044
Financing activity				0
Borrowing (repayment)	224000	-43,000	-49,000	132000
Ending cash balance	16,620	16,357	16,979	49956

Interest Expense	0	=224000 * 1% *1/12	=(224000-43000)*1% *1/12
		187	151

h. Income Statement	Total Qtr
Sales revenue	10,92,000
Cost of goods sold	6,55,200
Gross Margin	4,36,800
S&A expenses	2,25,540
Operating Income	2,11,260
Interest Expense	338
	2,10,923
Less : Dividend Paid	28000
Net income	1,82,923

i. Balance Sheet
Assets
Cash	16,979
Accounts Receivable	2,37,600.00
Inventory	15,000.00
Store Fixtures	182400
Accumulated Depreciation	-13200
Total Assets	4,38,779
Liabilities
Accounts payable	49,656.00
Utilities Payable	2600
Sales Commission payable	21,600.00
Line of credit liability	1,32,000
Total Liabilities	2,05,856.00
Equity
Common stock	50000
Retained Earnings	182923
Total Equity	232923
Total Liability and equity	438779