Question
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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-$19 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) 23,000 29,000 43,000 68,000 103,000 June (budget) July (budget) August (budget) September (budget) 53,000 33,000 31,000 28,000 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 $5.50 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: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $ 350,000 $ 33,000 $ 136,000 $ 14,500 $ 4,500 $ 29,000
Insurance is paid on an annual basis, in November of each year. The company plans to purchase $23,500 in new equipment during May and $55,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $26,250 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below: $ 89,000 Assets Cash Accounts receivable ($55,100 February sales; $653,600 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 708, 700 149,600 28,500 1,100,000 $ 2,075,800 $ 115,000 26,250 1,100,000 834,550 $ 2,075,800 The company maintains a minimum cash balance of $65,000. 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 $65,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
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 $65,000. (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 $ 89,000 $ 65,470 885,400 1,377,500 974,400 1,442,970 June $ 353,940 1,700,500 2,054,440 Quarter $ 89,000 3,963,400 4,052,400 Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Merchandise purchases Advertising Rent Salaries Commissions 340,500 51,680 % 350,000 X 33,000 X 136,000 X 14,500 453,750 78,280 X 350,000 X 33,000 X 136,000 X 14,500 23,500 352,000 40,280 X 350,000 X 33,000 X 136,000 X 14,500 55,000 1,146,250 170,240 1,050,000 99,000 408,000 43,500 78,500 26,250 3,021,740 1,030,660 Utilities Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: 26,250 951,930 22,470 1,089,030 353,940 980,780 1,073,660
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 Sales Variable expenses: Cost of goods sold Commissions 170,240 $ 4,256,000 (1,232,000) (1,061,760) 3,194,240 Contribution margin Fixed expenses: Advertising Rent Salaries 1,050,000 99,000 408,000 435,000 13,500 29,000 Utilities Insurance Depreciation Net operating income Interest expense Net income 2,034,500 1,159,740 (1,290) $ 1,158,450
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 Cash 1,029,370 Accounts receivable Inventory Prepaid insurance Property and equipment, net 1,001,300 72,600 15,000 1,149,500 1,149,500 Total assets 3,267,770 Liabilities and Stockholders' Equity Accounts payable $ 123,750 Dividends payable 26,250 Common stock 1,100,000 Retained earnings 2,017,770 Total liabilities and stockholders' equity 3,267,770
Answers
Cash Budget April May June Quarter Beginning Cash $ 89,000 $ 65,470 $ 353,940 $ 89,000 Total Cash Collections $ 885,400 $ 1,377,500 $ 1,700,500 $ 3,963,400 Total Cash Available $ 974,400 $ 1,442,970 $ 2,054,440 $ 4,052,400 Deduct : Disbursements For Merchandise purchase $ 340,500 $ 453,750 $ 352,000 $ 1,146,250 Advertising $ 350,000 $ 350,000 $ 350,000 $ 1,050,000 Rent $ 33,000 $ 33,000 $ 33,000 $ 99,000 Salaries $ 136,000 $ 136,000 $ 136,000 $ 408,000 Commission 51680 78280 40280 $ 170,240 Utilities $ 14,500 $ 14,500 $ 14,500 $ 43,500 Equipment Purchases $ 23,500 $ 55,000 $ 78,500 Dividend Paid $ 26,250 $ 26,250 Total Disbursements $ 951,930 $ 1,089,030 $ 980,780 $ 3,021,740 Excess (Deficiency) of cash $ 22,470 $ 353,940 $ 1,073,660 $ 1,030,660 Financing Borrowing $ 43,000 $ 43,000 Interest $ -43,000 $ -43,000 Repayment $ -1,290 $ -1,290 Total Financing $ 43,000 $ - $ -44,290 $ -1,290 Ending Balance $ 65,470 $ 353,940 $ 1,029,370 $ 1,029,370 Income Statement
Utilities Expense = $43500
Depreciation = $87000 i.e. 29000 x 3Balance Sheet
Property Plant and Equipment = $1100000 + 78500 - 87000 = $1091500
Retained Earnings = $1959770
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