You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2589115 • Letter: Y
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.
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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—$15 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 $5.1 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.
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 $21,500 in new equipment during May and $51,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $23,250 each quarter, payable in the first month of the following quarter.
A listing of the company’s ledger accounts as of March 31 is given below:
The company maintains a minimum cash balance of $61,000. 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 $61,000 in cash.
Required:
1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.)
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. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
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) 22,200 June (budget) 52,200 February (actual) 28,200 July (budget) 32,200 March (actual) 42,200 August (budget) 30,200 April (budget) 67,200 September (budget) 27,200 May (budget) 102,200Explanation / Answer
Answer a Sales Budget April May June Total Sales in Units 67,200 102,200 52,200 221,600 Sp Per Unit 15 15 15 15 Total Sales in $ 1,008,000 1,533,000 783,000 3,324,000 Answer b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables Feb Sales 42,300 42,300 March Sales 443,100 63,300 - 506,400 April Sales 201,600 705,600 100,800 1,008,000 May Sales 306,600 1,073,100 1,379,700 June Sales Sales 156,600 156,600 Total cash Collections 687,000 1,075,500 1,330,500 3,093,000 Answer c Merchandise Purchase Budget April May June Total Sales In units 67,200 102,200 52,200 221,600 Add: Closing Inventory in units 40,880 20,880 12,880 12,880 Total Needs 108,080 123,080 65,080 234,480 Less: opening Inventory in uints (26,880) (40,880) (20,880) (26,880) Required Purchases in Units 81,200 82,200 44,200 207,600 Price per paid of Earings 5.10 5.10 5.10 5.10 Total Purchases in $ 414,120 419,220 225,420 1,058,760 Answer d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March 111,000 111,000 April Purchases 207,060 207,060 414,120 May Purchases 209,610 209,610 419,220 June Purchases 112,710 112,710 Total Cash Payment to Suppliers 318,060 416,670 322,320 1,057,050 Answer e Selling & Admn. Budget April May June Total Sales Comm. - 4% 40,320 61,320 31,320 132,960 Fixed Advt. 310,000 310,000 310,000 930,000 Rent (Fixed) 29,000 29,000 29,000 87,000 Salary Expense 128,000 128,000 128,000 384,000 Utilities 12,500 12,500 12,500 37,500 Insurance 4,100 4,100 4,100 12,300 Dep. 25,000 25,000 25,000 75,000 Total 548,920 569,920 539,920 1,658,760 Schedule of Cash payments of Selling & Admn. Budget April May June Total Sales Comm. - 4% 40,320 61,320 31,320 132,960 Fixed Advt. 310,000 310,000 310,000 930,000 Rent (Fixed) 29,000 29,000 29,000 87,000 Salary Expense 128,000 128,000 128,000 384,000 Utilities 12,500 12,500 12,500 37,500 Total 519,820 540,820 510,820 1,571,460 Cash budget April May June Total Opening cash Balance 85,000 61,870 158,380 85,000 Add: receipts Collection from Customers 687,000 1,075,500 1,330,500 3,093,000 Total Cash available 772,000 1,137,370 1,488,880 3,178,000 Less: Disbursements Cash Disbursement - Accounts Payable 318,060 416,670 322,320 1,057,050 Selling & Admn. Exp. 519,820 540,820 510,820 1,571,460 Purchase of Equipment - 21,500 51,000 72,500 Dividend Paid 23,250 - - 23,250 Total Disbursement 861,130 978,990 884,140 2,724,260 Cash Balance Closing (89,130) 158,380 604,740 453,740 Add: Finance from Bank 151,000 151,000 Less: Payment to Bank - - (151,000) (151,000) Less: Payment of interet - Bank loan - - (4,530) (4,530) Net Cash Balance Closing 61,870 158,380 449,210 449,210 Income Statement For the Qtr Ending June 30 Sales 3,324,000 Less: Variable Cost Cost of Goods Sold 1,130,160 Sales Comm. - 4 % of Sales 132,960 1,263,120 Contribution 2,060,880 Less: Fixed Cost Advt. 930,000 Rent (Fixed) 87,000 Salary Expense 384,000 Utilities 37,500 Insurance 12,300 Dep. 75,000 1,525,800 Operating Profit 535,080 Less: Interest Expenses 4,530 Net Income 530,550 Balance Sheet As on June 30 Assets Current Assets Cash 449,210 Accounts receivables 779,700 Prepaid Insurance 14,200 Inventory 65,688 1,308,798 Fixed Assets Property & Equipment 1,132,500 Less: Dep. (75,000) 1,057,500 Total Assets 2,366,298 Liabilities Accounts Payable 112,710 Dividends Payable 23,250 Total liabilities 135,960 Shareholders's Equity Common Stock 1,020,000 Retained Earnings 1,210,338 Total Stockholders equity 2,230,338 Total liabilities & Stockholders' Equity 2,366,298 - Schedule of Retained Earnings As on June 30 Opening Balance 703,038 Add: net income 530,550 Less: Dividend declared (23,250) Closing Balance 1,210,338
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