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Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows:

The company’s chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units.

All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

Each quarter’s ending finished goods inventory should equal 15% of the next quarter’s unit sales.

Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter’s ending raw materials inventory should equal 10% of the next quarter’s production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 yards.

Seventy percent of each quarter’s purchases are paid for in the quarter of purchase. The remaining 30% of each quarter’s purchases are paid in the following quarter.

Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred.

The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company’s lender imposes a simple interest rate of 3% per quarter on any borrowings.

Dividends of $15,000 will be declared and paid in each quarter.

The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the “first-out” to production and the most recently completed finished goods are the “first-out” to customers.

Required:

1. Using the indirect method, calculate Endless Mountain Company’s estimated net cash provided by operating activities for 2017.

2. Prepare the company’s budgeted statement of cash flows for the year ended December 31, 2017.

Endless Mountain Company Balance Sheet December 31, 2016 Assets Current assets: Cash $ 46,200 Accounts receivable (net) 260,000 Raw materials inventory (4,500 yards) 11,250 Finished goods inventory (1,500 units) 32,250 Total current assets $ 349,700 Plant and equipment: Buildings and equipment 900,000 Accumulated depreciation (292,000 ) Plant and equipment, net 608,000 Total assets $ 957,700 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 158,000 Stockholders’ equity: Common stock $ 419,800 Retained earnings 379,900 Total stockholders’ equity 799,700 Total liabilities and stockholders’ equity $ 957,700

Explanation / Answer

Sales Budget Q1 Q2 Q3 Q4 Total Budgeted Unit Sales 12000 37000 15000 25000 89000 Budgeted Selling price 32 32 32 32 32 Budgeted Sales 384000 1184000 480000 800000 2848000 Schedule of collections: Q1 Q2 Q3 Q4 Total December 2016 receivables 260000 260000 Q1 sales 288000 96000 384000 Q2 Sales 888000 296000 1184000 Q3 Sales 360000 120000 480000 Q4 Sales 600000 600000 Total Cash Collections 548000 984000 656000 720000 2908000 Receivables 96000 296000 120000 200000 200000 (b) Production Budget Q1 Q2 Q3 Q4 Total Budgeted unit sales 12000 37000 15000 25000 89000 Plus: Desired ending inventory 5550 2250 3750 1950 1950 Total Units needed 17550 39250 18750 26950 90950 Less: Beginning inventory 1500 5550 2250 3750 1500 Budgeted production units 16050 33700 16500 23200 89450 (c) Direct material budget Q1 Q2 Q3 Q4 Total Budgeted production units 16050 33700 16500 23200 89450 yards per unit of production 3.5 3.5 3.5 3.5 3.5 Total yards required for production 56175 117950 57750 81200 313075 Plus: Desired ending inventory 11795 5775 8120 5000 5000 Total yards neded 67970 123725 65870 86200 318075 Less: Beginning inventory 4500 11795 5775 8120 4500 Budgeted purchases -- pounds 63470 111930 60095 78080 313575 Cost per yard - $ 3 3 3 3 3 Budgeted purchases - $ 190410 335790 180285 234240 940725 Schedule of payments for raw materials Q1 Q2 Q3 Q4 Total December purchases 18000 18000 Q1 purchases 133287 57123 190410 Q2 purchases 235053 100737 335790 Q3 purchases 126200 54086 180285 Q4 purchases 163968 163968 Total payments for raw material 151287 292176 226937 218054 888453 Accounts Payable 57123 100737 54086 70272 70272 (d) Direct labor budget Q1 Q2 Q3 Q4 Total Budgeted production units 16050 33700 16500 23200 89450 Direct labor hours per unit 0.25 0.25 0.25 0.25 0.25 Direct labor hours for production 4013 8425 4125 5800 22363 Direct labor rate per hour - $ 18 18 18 18 18 Budgeted direct labor cost 72225 151650 74250 104400 402525 (e) Manufacturing overheads budget Q1 Q2 Q3 Q4 Total Budgeted direct labor hours 4013 8425 4125 5800 22363 Variable manufacturing overhead per hour 3 3 3 3 3 Variable manufacturing overheads 12038 25275 12375 17400 67088 Fixed manufacturing overhead 150000 150000 150000 150000 600000 Total manufacturing overheads 162038 175275 162375 167400 667088 Depreciation 20000 20000 20000 20000 80000 Cash payment for manufacturing overhrads 142038 155275 142375 147400 587088 (f) Selling and administrative expenses Q1 Q2 Q3 Q4 Total Variable selling and adn.expenses($1.25 per unit sold) 12000 37000 15000 25000 89000 Fixed selling and adn. Expenses Advertising 25000 25000 25000 25000 100000 Insurance 12000 12000 12000 12000 48000 Salaries 64000 64000 64000 64000 256000 Depreciation 8000 8000 8000 8000 32000 Property taxes 8000 8000 8000 8000 32000 Total selling and admn.expenses 117000 117000 117000 117000 468000 Cash payment for S&A expenses 109000 109000 109000 109000 436000 BUDGETED INCOME STATEMENT Sales Revenue 2848000 Cost of goods sold 1994963 Gross profit 853038 Selling and admn. Expenses Variable expenses 89000 Advertising 100000 Insurance 48000 Salaries 256000 Depreciation 32000 Property taxes 32000 Total Selling and admn.expenses 557000 Net income 296038 Units Cost/unit Value Beginning raw materials 4500 2.5 11250 Purchases 940725 Total raw material available 951975 Ending raw material 5000 3 15000 Raw material used for production 936975 Direct labor 402525 Manufacturing overhead 667088 Total manufacturing cost 2006588 Production - units 89450 Cost per unit         22.43 Beginning Inventory of finished goods 1500 21.5 32250 Cost of manufacture 2006588 Goods available for sale 2038838 Ending inventory of finished goods 1950 22.5 43875 Cost of goods sold 1994963

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