Boutique is a merchandising business located downtown in San Marcos, Texas. The

Question

Boutique is a merchandising business located downtown in San Marcos, Texas. The owners are Texas State alumni and they would like to maximize their profits. They understand that accurate budgeting will help obtain this goal. The company is completing its second year of operations and is preparing to build its master budget for the second quarter. The budget will detail each quarter’s activity and the total for the quarter. The master budget will be based on the following information: Sales were budgeted at $50,000 for September. Expected sales are $60,000 for October, $72,000 for November, $90,000 for December, $48,000 for January.

The gross margin is 25% of sales. Sales are projected to be 60% for cash and 40% on credit. Credit sales are collected in the month following the sale. The September accounts receivable are a result of the September credit sales. There are no bad debts.

Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold. Merchandise Inventory Purchases are paid as follows; 50% of a month’s inventory purchases is paid for in the month of purchase; the other 50% is paid for in the following month.

The accounts payable at September 31 are the result of September purchases of inventory. Monthly operating expenses are as follows: commissions are 12% of sales; rent is $2,500 per month, other operating expenses (excluding depreciation) are 6% of sales. Assume these expenses are paid monthly. Deprecation is $900 per month.

Equipment costing $1,500 will be purchased for cash in October. Income tax is estimated to be 28% of operating income. Estimated taxes are accrued each month and paid in cash in the last month of the quarter. Management would like to maintain a minimum cash balance of at least $3,000 at the end of each month. The boutique has an agreement with a local bank that allows them 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. They would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. T he balance sheet as of September 31, is as follows:

Assets September 31 Cash $8,000

Accounts Receivable 20,000

Inventory 36,000 Plant & Equipment, net 120,000 Total assets $184,000

Liabilities & Equity Accounts Payable $21,750

Retained Earnings 162,250

Total liabilities & equity $184,000

Assumptions - Bobcat Boutique Expected Sales September October $60,000.00 November December January Cash Sales Credit Sales Gross Margin of sales CGS of sales DEI following month CGS Operating Expenses: Commissions of sales Other Operating Expense of sales Rent Depreciation Inventory Purchases paid month of purchase paid one month after purchase Equipment Purchase in October Assets Cash Accounts Receivable Inventory Plant & Equipment, net Liabilities & Equity Accounts Payable Retained Earnings Income Tax Rate of Operating Income New Borrowings October November Loan Interest Rate per month

Explanation / Answer

Workings:

BOUTIQUE Cash budget for the quarter ending December 31 October November December Total Opening cash balance 8000 3850 3090 8000 Collection from sales 56000 67200 82800 206000 Cash available for disbursements 64000 71050 85890 214000 Cash disbursements    For cost of goods sold 47850 58500 53550 159900    For commissions 7200 8640 10800 26640    For rent 2500 2500 2500 7500    For other operating expenses 3600 4320 5400 13320    For income tax 0 0 1453 1453    For interest 150 150 Total cash disbursements 61150 73960 73853 208963 Cash surplus 2850 -2910 12037 5037 Minumum cash balance 3000 3000 3000 3000 Financing Borrowing 1000 6000 7000 Repayment -7000 -7000 Total financing 1000 6000 -7000 0 Ending cash balance 3850 3090 5037 5037 Interest * 10 70 70 150 BOUTIQUE Budgeted income statement for the quarter ending December 31 October November December Total Sales Revenue 60000 72000 90000 222000    Les: Cost of goods sold 45000 54000 67500 166500 Gross Margin 15000 18000 22500 55500 Less: Operating expenses    Commisions 7200 8640 10800 26640    Rent 2500 2500 2500 7500    Other operating expenses 3600 4320 5400 13320    Depreciation 900 900 900 2700 Total operating expenses 14200 16360 19600 50160 Net operating income 800 1640 2900 5340     Interest expense 10 70 70 150 Net income before income tax 790 1570 2830 5190 Income tax (28%) 221 440 792 1453 Net Income 569 1130 2038 3737 BOUTIQUE Budgeted balance sheet as at December 31 Assets Cash 5037 Accounts receivable 36000 Inventory 28800 Plant & Equipment, net Beginning balance 120000 Depreciation 2700 117300 Total Assets 187137 Liabilities and equity Accounts payable 21150 Retained earnings on October 1 162250 Net income for the quarter 3737 165987 Total liabilities and equity 187137

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