Nordic Company, a merchandising company, prepares its master budget on a quarter

Question

Nordic Company, a merchandising company, prepares its master budget on a quarterly basis. The

following data have been assembled to assist in preparation of the master budget for the second quarter.

As of March 31 (the end of the prior quarter). the company's balance sheet showed the following account

balances:

Actual sales for march and budgeted sales for april-july are as follows:

april

Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in t he month

following the sale. The accounts receivable at March 31 are a result of March credit sales.

The company's gross margin percentage is 40% of sales. (In other words. cost of goods sold is 60% of

sales.)

Monthly selling and administrative expenses are budgeted as follows: salaries and wages, $7,500 per month; shipping, 6% of sales; advertising, $6,000 per month; other expenses. 4% of sales. Depreciation. including depreciation on new assets acquired during the quarter, will be $6,000 for the quarter.

Each month's ending inventory should equal 30% of the following month's cost of goods sold.

Half of a month's inventory purchases are paid for in the month of purchase and half in the following

month.

Equipment purchases during the quarter will be as follows: April. $11,500: and May. $3,000.

Dividends totaling $3,500 will be declared and paid in June.

Management wants to maintain a minimum cash balance of $8,000.The company has an agreement with a local bank that allows the company to borrow in increments of $1.000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded.

The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter

Required:

Using the data above, complete the following statements and schedules for the second quarter:

This asks to complete the cash budget chart above.

cash 9,000 accounts receivable 48,000 inventory 12,600 buildings and equipment (net) 214,100 accounts payable 18,300 capital stock 190,000 retained earnings 75,400 283,700 283,700

Explanation / Answer

Preparation of Cash budget Chart:

                  Particulars                                        April               May             June              Total

           Cash balance beginning                            9,000               8,350           19,050               36,400

Add : Cash collections                                         62,000            73,000          86,000              221,000

           Total cash available                                   71,000            81,350          105,050            257,400

Less: Cash disbursements                              

          For inventory purchase                               40,650             48,300          49,350             138,300

          For selling & Admin expenses                     20,500             22,000          22,500             65,000

          For equipment purchases                            11,500             3,000             -                   14,500

          For dividends                                              -                      -                   3,500                3,500

          For Loan repayment                                      -                    -                    21,210             21,210

        Total Cash disbursements                              72,650           73,300            96,560             242,510

         Excess/(deficiency of Cash)                           -1,650             8,050              8,490              14,890

           Financing                                                    10,000          11,000                -                    21,000

          Cash balance ending                                      8,350           19,050              8,490              35,890

Working Notes:

      

Preparation of Cash budget Chart: april may june total Opening cash 9000 8350 19050 =+B3+C3+D3 add cash collections [Sales] 62000 =70000*0.8+85000*0.2 =85000*0.8+90000*0.2 =+B4+C4+D4 total cash available 71000 =+C3+C4 =+D3+D4 =+B5+C5+D5 less cash disbursements: =+B6+C6+D6 for inventory purchases 40650 48300 49350 =+B7+C7+D7 for selling and administrative expenses 20500 =7500+85000*0.06+6000+85000*0.04 =7500+90000*0.06+6000+90000*0.04 =+B8+C8+D8 for equipment purchases 11500 3000 0 =+B9+C9+D9 for dividends 0 0 3500 =+B10+C10+D10 For interest on loan 0 0 =+B11+C11+D11 For loan repayment 0 0 21210 =+B12+C12+D12 total cash disbursements 72650 =+C7+C8+C9 =+D7+D8+D10+D11+D12 =+B13+C13+D13 excess (deficiency) of cash -1650 =+C5-C13 =+D5-D13 =+B14+C14+D14 financing 10000 11000 =+B15+C15+D15 etc. Closing Cash =+B15+B14 =+C15+C14 =+D14 Inventory Budget inventory budget April May June Opening 12600 15300 16200 Purchases(Actual) =70000*0.6+15300-12600 =85000*0.6+16200-15300 =90000*0.6+9000-16200 Closing bal =85000*0.6*0.3 =90000*0.6*0.3 =50000*0.6*0.3 Cash paid =44700/2+18300 =51900/2+44700/2 =46800/2+51900/2

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