Question

E3-15. Comprehensive Budgeting. cial data for its first year of operations (S thousands): The Pacific Company reports the following finan THE PACIFIC COMPANY Income Statement For the Year Ended December 31, 2015 $300 90 210 80 $130 Sales revenue Cost of goods sold Other expenses Net income THE PACIFIC COMPANY Balance Sheet December 31, 2015 Assets Cash $ 850 150 195 2,750 Other assets Liabilities and Equity 2,025 ing assumptions apply to the forecast of the next five The follow for The Pacific Company: a. Sales revenues will grow at a constant 5 percent each month. b. Cost of goods sold will be a constant 30 percent of sales revenue e. Other expenses will grow at a constant monthly rate of 4 percent. December other expenses were $80 d. Dividends wil be paid out monthly at a rate of 18 percent of net income e. Cash will be collected at a rate of 65 percent of current month sales and the remaining 35 percent will be collected the following month. December sales were $300. Payments will be made in the month supplies are delivered. The Pacific Company requires supplies two months ahead of sales; hence cash disbursements are estimated to be equal to the following two months' cost of goods sold, plus the current month's other expenses and dividends. Other assets grow at a 5 percent monthly rate. There will be no additional equity additions. Total equity will increase by the amount of retained carnings increases. f. h. i. Total liabilities will increase by an amount needed to keep total liabilities plustotl equity equal to total assets. Required: 1. Prepare the following for The Pacific Company's next four months a. b. c. Compute the strategic growth rate for The Pacific Company for the next four months A budgeted income statement A budgeted balance sheet A cash flow budget 2. 3. Comment on the company's SGR relative to its growth in sales revenuc.

Answer 1

1.a)

Budgeted Income Statement
Particulars	Jan-16	Feb-16	Mar-16	Apr-16
Sales Revenue	$    315.00	$    330.75	$    347.29	$    364.65
Less: Cost of goods sold	$      94.50	$      99.23	$    104.19	$    109.40
Gross Profit	$    220.50	$    231.53	$    243.10	$    255.26
Less: Other Expenses	$      83.20	$      86.53	$      89.99	$      93.59
Net Income	$    137.30	$    145.00	$    153.11	$    161.67
Dividend Payment	$      24.71	$      26.10	$      27.56	$      29.10
Transfer to Retained Earnings	$    112.59	$    118.90	$    125.55	$    132.57
Equity(Including Retained Earning of earlier months)	$ 2,025.00	$ 2,137.59	$ 2,256.48	$ 2,382.04
Return on equity (Net Income/Equity)	7%	7%	7%	7%

b)Balance Sheet

Budgeted Balancesheet at end of April 2015
Particulars	Amount($)
Assets
Cash	$      682.58
Accounts Receivable	$      127.63
Inventory	$      235.47
Other Assets	$   3,342.64
Total	$   4,388.33
Liabilities	$   2,006.29
Total Liabilities
Total Equiy	$   2,382.04
Total	$   4,388.33

c)Cash Flow Budget

Particulars	Jan-16	Feb-16	Mar-16	Apr-16
(A) Opening Cash Balance	850	$    810.15	$    768.99	$    726.48
(B) Receipts
1.Collection from Debtors(Refer Note 1)	$    309.75	$    325.24	$    341.50	$    358.57
C. Payments
1.Payment to Suppliers (Refer Note 2)	$    104.19	$    109.40	$    114.87	$    120.61
2.Payment of Other Expenses	$      83.20	$      86.53	$      89.99	$      93.59
3.Payment of Dividend	$      24.71	$      26.10	$      27.56	$      29.10
4.Addition to Other Assets	$    137.50	$    144.38	$    151.59	$    159.17
(D) Closing Balance	$    810.15	$    768.99	$    726.48	$    682.58

Note 1: Working of Accounts Receivable
Particulars	Jan-16	Feb-16	Mar-16	Apr-16
For Sales of Dec-2015	$    105.00
For Sales of Jan-2016	204.75	110.25
For Sales of Feb-2016		$    214.99	$    115.76
For Sales of March-2016			$    225.74	121.55063
For Sales of April-2016				$    237.02
Total	$    309.75	$    325.24	$    341.50	$    358.57
Note :2 Working of payment to suppliers
Particulars	Jan-16	Feb-16	Mar-16	Apr-16
For the Purchases of March-16	$    104.19
For the Purchases of April-16		$    109.40
For the Purchases of May-16			$    114.87
For the Purchases of June-16				$    120.61
Total	$    104.19	$    109.40	$    114.87	$    120.61

Calculation of Strategic Growth Rate

Particulars	Jan-16	Feb-16	Mar-16	Apr-16
Return on Equity	7%	7%	7%	7%
Retaining Ratio( i.e, 1-Payout ratio)	0.98	0.98	0.98	0.98
Strategic Growth Rate	0.07	0.07	0.07	0.07

Comment on SGR- The SGR of the Pacific Company is remained as constant due o the monthly payment of dividend. Inspite of increase in sales there , the earning after the dividend payment are reinvested in the company at same rate of Interest. Hence as result of it, the SGR remains constant irrespective of the increase in sales revenue.