You have just been hired as a new management trainee by Earrings Unlimited, a di

Question

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.

The company sells many styles of earrings, but all are sold for the same price—$13 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

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 $4.7 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, with no discount, and payable within 15 days. The company has found, however, that 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.

     The company plans to purchase $19,500 in new equipment during May and $47,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $20,250 each quarter, payable in the first month of the following quarter.

     The company maintains a minimum cash balance of $57,000. 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 $57,000 in cash.

2.

a. Prepare a cash budget. Show the budget by month and in total

b. Prepare a budgeted income statement for the 3 month period ending June 30

c. Prepare a budgeted balance statement for the 3 month period ending June 30

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.

Explanation / Answer

Sales Budget April May June Sales 66400 101400 51400 Sales in $ 863200 1318200 668200 Purchase Budget April May June Sales Made During The Month 66400 101400 51400 Add: Ending Balance 40560 20560 12560 Less: Beginning Balance 26560 40560 20560 Total Purchases Required to be made 80400 81400 43400 Cost of Earrings(4.7 per pair) 377880 382580 203980 Cash Payments for Purchases April May June Payments made in the Month of Purchase 188940 191290 101990 Payments Made in the Following Month 107000 188940 191290 Total Payments Made for Purchases 295940 380230 293280 Sales Reciepts April May June Sales 863200 1318200 668200 Sales Collected in Current Month 172640 263640 133640 Sales Collected in Next Month 376740 604240 922740 Sales Collected in 2nd Next Month 35620 53820 86320 Total Collection of Sales 585000 921700 1142700 Arrounts Recievale Balance May Sales 131820 June Sales 534560 Total AR 666380 Cash Budget April May June Sales Reciepts 585000 921700 1142700 Less: Purchase Payments -295940 -380230 -293280 Less: Payments for Expenses Sales Commisions -34528 -52728 -26728 Advertising -270000 -270000 -270000 Rent -25000 -25000 -25000 Salaries -120000 -120000 -120000 Utilities -10500 -10500 -10500 Equipment -19500 -47000 Dividend -20250 Interest on Loan -1469.68 -1046.95 Total Cash after Reducing Expenses from Reciepts -170968 42272.32 328895.1 Add: Opening Cash Balance 81000 57000 57000 -89968 99272.32 385895.1 Loan Taken/Repaid 146968 -42272.3 -104696 Closing Cash Balance 57000 57000 281199.4 Budgeted Income Statement April May June Total Sales 863200 1318200 668200 2849600 Less: Cost of Goods Sold 312080 476580 241580 1030240 Gross Profit 551120 841620 426620 1819360 Less: Expenses Sales Commisions 34528 52728 26728 113984 Advertising 270000 270000 270000 810000 Rent 25000 25000 25000 75000 Salaries 120000 120000 120000 360000 Utilities 10500 10500 10500 31500 Insurance 3700 3700 3700 11100 Depreciation 21000 21000 21000 63000 Interest on Loan 1469.68 1046.95 2516.63 Net Income 66392 337222.3 -51355 352259.4 Budgeted Balance Sheet Ended June 30 Assets Cash 281199.4 Accounts Receivable 666380 Inventory 59032 (12560*4.7) Prepaid Insurance 13400 Property and Equipment 1023500 Total Assets 2043511 Liabilities Accounts Payable 101990 Retained Earnings 1001521 Common Stock 940000 2043511 Retained Earnings Beginning Balance 649262 Add: Net Income 352259 Total 1001521

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