Question

You have just been hired as a new management trainee by Earrings Unlimited, 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 distributor ofearrings to various retail outlets located 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): January (actual) February (actual) March (actual) April (budget) May (budget) June (budget) July (budget) August (budget) September (budget) 23,400 29,400 53,400 33,400 31,400 28,400 43,400 68,400 103,400 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 $5.70 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: Monthly operating expenses for the company are given below: Variable 4 of sales Sales commissions Fixed: $ 370,000 Advertising Rent 35,000 Salaries $140,000 Utilities 15,500 $ 4,700 $31,000 Insurance Depreciation Insurance is paid on an annual basis, in November of each year. The company plans to purchase $24,500 in new equipment during May and $57,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,750 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 S 91,000 Accounts receivable ($47,040 February sales $555,520 March sales) 602,560 155.952 Tn Prepaid insurance 29,500 Property and equipment (net) 1,120,000 Prepaid insurance Property and equipment (net) 29,500 1,120,000 1,999,012 Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable S 117,000 27,750 1,140,000 Common stock Retained earnings 714,262 Total liabilities and stockholders' equity 1,999,012 The company maintains a minimum cash balance of $67,000. 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 $67,000 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 Accounts payable Dividends payable S 117,000 27,750 Common stock 1,140,000 Retained earnings 714,262 1,999,012 Total liabilities and stockholders' equity The company maintains a minimum cash balance of $67,000. All borrowing is done at the beginning of a month; any repayments are month made at the end of 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 $67,000 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 $67,000. 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

Earrings Unlimited Sales Budget April May June Quarter Budgeted Unit Sales |Selling Price per unit Total Sales 53,400 68,400 103,400 225,200 16 16 16 16 1,094,400 1,654,400 854,400 3,603,200 Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February Sales March Sales April Sales May Sales June Sales Total Cash Collections 47,040 47,040 486,080 69,440 555,520 218,880 766,080 109,440 1,094,400 330,880 1,158,080 1,488,960 170,880 170,880 752,000 1,166,400 1,438,400 3,356,800

Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted Unit Sales Add: desired Ending Inventory Inventory Total Needs LesS: Beginning Merchandise Inventory Required Purchases Unit Cost Required Dollar Purchases 53,400 68,400 103,400 225,200 41,360 21,360 13,360 13,360 124,760 109,760 66,760 238,560 27,360 41,360 21,360 27,360 82,400 83,400 45,400 211,200 5.70 5.70 5.70 5.70 469,680 475,380 1,203,840 258,780 Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts Payable 117,000 117,000 April Purchases May Purchases June Purchases Total Cash Payments 234,840 234,840 469,680 237,690 237,690 475,380 129,390 129,390 351,840 472,530 367,080 1,191,450

Earrings Unlimited Cash Budget April May June Quarter Beginning Cash Balance Add: Collection from Customers Total Cash Available Less: Cash Disbursements Merchandise Purchases Advertising 91,000 67,134 109,828 91,000 3,356,800 752,000 1,166,400 1,438,400 843,000 1,233,534 1,548,228 3,447,800 351,840 472,530 367,080 1,191,450 370,000 370,000 370,000 1,110,000 Rent 35,000 35,000 35,000 105,000 Salaries Commissions Utilities Equipment Purchases Dividend Paid Total Cash Disbursements Excess of Cash Available Over Disbursements Financing: Borrowings Repayments Interest Total Financing Ending Cash Balance Interest $208,000 * 1% * 3 = $6,240 140,000 140,000 140,000 420,000 43,776 66,176 34,176 144,128 15,500 15,500 15,500 46,500 24,500 57,000 81,500 27,750 27,750 1,123,706 1,018,756 3,126,328 983,866 -140,866 109,828 529,472 321,472 208,000 208,000 -208,000 -208,000 -6,240 -6,240 208,000 -214,240 -6,240 67,134 109,828 315,232 315,232

Earrings Unlimited Budgeted Income Statement For the Three Months ended June 30 Sales 3,603,200 Less: Variable expenses Beginning inventory Add: Purchases Less: Ending inventory Cost of goods sold Sales commission Contribution margin Less: Operating expenses |Advertising Rent Salaries 155,952 1,203,840 76,152 1,283,640 144,128 2,175,432 1,110,000 105,000 420,000 Utilities 46,500 Insurance Depreciation Net Operating income |Interest Expense Net Income 14,100 93,000 1,788,600 386,832 6,240 380,592

Earrings unlimited Budgeted Balance Sheet June 30 Assets Cash Accounts receivable |(May sales $165,440; June sales $683,520) Inventory Prepaid insurance Property, plant and equipment (net) Total assets 315,232 848,960 76,152 15,400 1,108,500 2,364,244 Liabilities and Stockholders' Equity Accounts payable Dividends payable |Common Stock Retained earnings Total liabilities and stockholder's equity 129,390 27,750 1,140,000 1,067,104 2,364,244 Calculation: Property, Plant and Equipment (Net) = $1,120,000 $24,500 $57,000- $93,000 $1,108,500 +