Problem 21-22A Preparing a master budget for a retail company with no beginning

Question

Problem 21-22A Preparing a master budget for a retail company with no beginning account balances
Unici Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2006. The company president formed a planning committee to prepare a master budget for the first three months of operation. He assigned you, the budget coordinator, the following tasks.

Required
a. October sales are estimated to be $120,000 of which 40 percent will be cash and 60 percent will be credit. The company expects sales to increase at the rate of 25 percent per month. Prepare a sales budget.
b. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts.
c. 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 at December 31 is expected to be $12,000. Assume that all purchases are made on account. Prepare an inventory purchases budget.
d. The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the following month. Prepare a cash payments budget for inventory purchases.
e. Budgeted selling and administrative expenses per month follow.

Salary expense (fixed) $18,000
Sales commissions 5 percent of Sales
Supplies expense 2 percent of Sales
Utilities (fixed) $1,400
Depreciation on store equipment (fixed)* $4,000
Rent (fixed) $4,800
Miscellaneous (fixed) $1,200

*The capital expenditures budget indicates that Unici will spend
$164,000 on October 1 for store fixtures, which are expected to have a
$20,000 salvage value and a three-year (36-month) useful life.

Explanation / Answer

Sales budget sales of october is estimated $120,000 out of this 40% is cash sales 120000*40% $48,000 out of this 60% is credit sales 120000*60% $72,000 November sales sales are expected to increase 25% per month 120000*125/100 $150,000 December sales 150000*125/100 $187,500 October November December sales $120,000 $150,000 $187,500 cash sales 40% $48,000 $60,000 $75,000 credit sales 60% $72,000 $90,000 $112,500 B.Cash collections October November December cash sales $48,000 $60,000 $75,000 Credit sale collections of previous month $72,000 $90,000 Total cash receipts $48,000 $132,000 $165,000 c.Inventory purchase budget Opening inventory closing inventory 10% of cost of goods sold of next month cost of goods sold is 60% of sales of that month $72,000 $90,000 $112,500 Ending inventory is 10% of next month sales $15,000 $18,750 $12,000 Purchases=Sales+closing inventory-opening inventory purchses of October=$120000+$15000-0 $135,000 purchases of november=$150000+$18750-$15000 $153,750 purchases of december=$187500+$12000-$18750 $180,750 d. cash payment budget for inventory purchaes October November December purchases $135,000 $153,750 $180,750 70% payment in the same month 94500 $107,625 $126,525 30% payment in the following month $40,500 $46,125 Total cash payments against purchase inventory $94,500 $148,125 $172,650 e. Budgeted selling and administration expenses October November December Salary expenses (fixed) $18,000 $18,000 $18,000 sales commission 5% on sales $6,000 $7,500 $9,325 supplies 2% on sales $2,400 $3,000 $3,750 Utilities (fixed) $1,400 $1,400 $1,400 Depreciation on stores equipment (fixed) $4,000 $4,000 $4,000 Rent (fixed) $4,800 $4,800 $4,800 Miscellaneous(fixed) $1,200 $1,200 $1,200 Total expenses $37,800 $39,900 $42,475

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