I have 1 done, but am unsure about 2 and 3 You have just been hired as a new man
ID: 2547969 • Letter: I
Question
I have 1 done, but am unsure about 2 and 3
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—$16 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 $4.60 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:
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $19,000 in new equipment during May and $46,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $19,500 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
The company maintains a minimum cash balance of $56,000. 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 $56,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. 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 $56,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
January (actual) 21,200 June (budget) 51,200 February (actual) 27,200 July (budget) 31,200 March (actual) 41,200 August (budget) 29,200 April (budget) 66,200 September (budget) 26,200 May (budget) 101,200Explanation / Answer
Answer a Sales Budget April May June Total Sales in Units 66,200 101,200 51,200 218,600 Sp Per Unit 16 16 16 16 Total Sales in $ 1,059,200 1,619,200 819,200 3,497,600 Answer b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables Feb Sales 43,520 43,520 March Sales 461,440 65,920 - 527,360 April Sales 211,840 741,440 105,920 1,059,200 May Sales 323,840 1,133,440 1,457,280 June Sales Sales 163,840 163,840 Total cash Collections 716,800 1,131,200 1,403,200 3,251,200 Answer c Merchandise Purchase Budget April May June Total Sales In units 66,200 101,200 51,200 218,600 Add: Closing Inventory in units 40,480 20,480 12,480 12,480 Total Needs 106,680 121,680 63,680 231,080 Less: opening Inventory in uints (26,480) (40,480) (20,480) 26,480 Required Purchases in Units 80,200 81,200 43,200 257,560 Price per paid of Earings 4.60 4.60 4.60 4.60 Total Purchases in $ 368,920 373,520 198,720 941,160 Answer d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March 106,000 106,000 April Purchases 184,460 184,460 368,920 May Purchases 186,760 186,760 373,520 June Purchases 99,360 99,360 Total Cash Payment to Suppliers 290,460 371,220 286,120 947,800 Answer e Selling & Admn. Budget April May June Total Sales Comm. - 4% 42,368 64,768 32,768 139,904 Fixed Advt. 260,000 260,000 260,000 780,000 Rent (Fixed) 24,000 24,000 24,000 72,000 Salary Expense 118,000 118,000 118,000 354,000 Utilities 10,000 10,000 10,000 30,000 Insurance 3,600 3,600 3,600 10,800 Dep. 20,000 20,000 20,000 60,000 Total 477,968 500,368 468,368 1,446,704 Schedule of Cash payments of Selling & Admn. Budget April May June Total Sales Comm. - 4% 42,368 64,768 32,768 139,904 Fixed Advt. 260,000 260,000 260,000 780,000 Rent (Fixed) 24,000 24,000 24,000 72,000 Salary Expense 118,000 118,000 118,000 354,000 Utilities 10,000 10,000 10,000 30,000 Total 454,368 476,768 444,768 1,375,904 Cash budget April May June Total Opening cash Balance 80,000 56,472 320,684 80,000 Add: receipts Collection from Customers 716,800 1,131,200 1,403,200 3,251,200 Total Cash available 796,800 1,187,672 1,723,884 3,331,200 Less: Disbursements Cash Disbursement - Accounts Payable 290,460 371,220 286,120 947,800 Selling & Admn. Exp. 454,368 476,768 444,768 1,375,904 Purchase of Equipment - 19,000 46,000 65,000 Dividend Paid 19,500 - - 19,500 Total Disbursement 764,328 866,988 776,888 2,408,204 Cash Balance Closing 32,472 320,684 946,996 922,996 Add: Finance from Bank 24,000 - 24,000 Less: Payment to Bank - (24,000) (24,000) Less: Payment of interet - Bank loan - (720) (720) Net Cash Balance Closing 56,472 320,684 922,276 922,276 Income Statement For the Qtr Ending June 30 Sales 3,497,600 Less: Variable Cost Cost of Goods Sold 1,005,560 Sales Comm. - 4 % of Sales 139,904 1,145,464 Contribution 2,352,136 Less: Fixed Cost Advt. 780,000 Rent (Fixed) 72,000 Salary Expense 354,000 Utilities 30,000 Insurance 10,800 Dep. 60,000 1,306,800 Operating Profit 1,045,336 Less: Interest Expenses 720 Net Income 1,044,616 Balance Sheet As on June 30 Assets Current Assets Cash 922,276 Accounts receivables 817,280 Prepaid Insurance 13,200 Inventory 57,408 1,810,164 Fixed Assets Property & Equipment 1,075,000 Less: Dep. (60,000) 1,015,000 Total Assets 2,825,164 Liabilities Accounts Payable 99,360 Dividends Payable 19,500 Total liabilities 118,860 Shareholders's Equity Common Stock 920,000 Retained Earnings 1,786,304 Total Stockholders equity 2,706,304 Total liabilities & Stockholders' Equity 2,825,164 - Schedule of Retained Earnings As on June 30 Opening Balance 761,188 Add: net income 1,044,616 Less: Dividend declared (19,500) Closing Balance 1,786,304
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