Question

Vernon Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2019. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks:

Problem 14-23 Part 1

Required

A. October sales are estimated to be $280,000, of which 45 percent will be cash and 55 percent will be credit. The company expects sales to increase at the rate of 25 percent per month. Prepare a sales budget.

B. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts.

C. The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $13,600. Assume that all purchases are made on account. Prepare an inventory purchases budget.

D. The company pays 80 percent of accounts payable in the month of purchase and the remaining 20 percent in the following month. Prepare a cash payments budget for inventory purchases.

E. Budgeted selling and administrative expenses per month follow:

Salary expense (fixed)	$	19,600
Sales commissions		5	% of Sales
Supplies expense		2	% of Sales
Utilities (fixed)	$	3,000
Depreciation on store fixtures (fixed)*	$	5,600
Rent (fixed)	$	6,400
Miscellaneous (fixed)	$	2,800

*The capital expenditures budget indicates that Vernon will spend $237,600 on October 1 for store fixtures, which are expected to have a $36,000 salvage value and a three-year (36-month) useful life.

Use this information to prepare a selling and administrative expenses budget.

F. Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses.

G. Vernon borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 1 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $28,000 cash cushion. Prepare a cash budget.

Problem 14-23 Preparing a master budget for retail company with no beginning account balances LO 14-2, 14-3, 14-4, 14-5, 14-6

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Vernon Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2019. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks:

Problem 14-23 Part 2

H. Prepare a pro forma income statement for the quarter.

I. Prepare a pro forma balance sheet at the end of the quarter.

H.

	VERNON COMPANY Pro Forma Income Statement For the Quarter Ended December 31, 2019 Sales revenue Cost of goods sold Gross margin 0 Selling and administrative expenses Operating income 0 Interest expense Net income

Answer 1

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A. Sales Budget
		Oct	Nov	Dec	Total	Jan
Budgeted Total Sale		$          280,000	$                  350,000	$         437,500	$      1,067,500	$                         546,875
B. Schedule of Cash Receipt
	Credit Sale 55%	Oct	Nov	Dec	Total	Accounts Receivable
Current Cash Collection 45%		$          126,000	$                  157,500	$         196,875	$         480,375
October Sale	$                                154,000		$                  154,000		$         154,000
November Sale	$                                192,500			$         192,500	$         192,500
December Sale	$                                240,625				$                   -	$                         240,625
Total Collection		$          126,000	$                  311,500	$         389,375	$         826,875	$                         240,625
C. Inventory Purchase Budget
		Oct	Nov	Dec	Total
Cost of Goods Sold	60% of Sale	$          168,000	$                  210,000	$         262,500	$         640,500
Add: Desired Ending Inventory	10% of next	$             21,000	$                    26,250	$           13,600	$           13,600
Total Need		$          189,000	$                  236,250	$         276,100	$         654,100
Less: Beginning Inventory		$                     -	$                   -21,000	$          -26,250	$                   -
Budgeted Purchase of Material Units		$          189,000	$                  215,250	$         249,850	$         654,100
D. Cash Payment budget for Inventory	80%	Same
	20%	Next
		Oct	Nov	Dec	Total	Accounts Payable
October Pur		$          151,200	$                    37,800		$         189,000
Nov Pur			$                  172,200	$           43,050	$         215,250
Dec Pur				$         199,880	$         199,880	$                           49,970
Total Budgeted Payment for Pur		$          151,200	$                  210,000	$         242,930	$         604,130	$                           49,970
E. Selling and Administrative Budget
		Oct	Nov	Dec	Total
Salary Expense		$             19,600	$                    19,600	$           19,600	$           58,800
Sales Commission	5% of Sales	$             14,000	$                    17,500	$           21,875	$           53,375
Supplies Expense	2% of Sales	$               5,600	$                      7,000	$             8,750	$           21,350
Utilities		$               3,000	$                      3,000	$             3,000	$             9,000
Depreciation		$               5,600	$                      5,600	$             5,600	$           16,800
Rent		$               6,400	$                      6,400	$             6,400	$           19,200
Misc		$               2,800	$                      2,800	$             2,800	$             8,400
Total Budgeted Gen and Adm Expense		$             57,000	$                    61,900	$           68,025	$         186,925
F. Cash Payment Budget for Selling and Adm:
		Oct	Nov	Dec	Total
Total Budgeted Gen and Adm Expense		$             57,000	$                    61,900	$           68,025	$         186,925
Less: Depreciation		$             -5,600	$                     -5,600	$            -5,600	$          -16,800
Less: Sales Commission		$           -14,000	$                   -17,500	$          -21,875	$          -53,375
Less: Utilities		$             -3,000	$                     -3,000	$            -3,000	$            -9,000
Add: Sales Commission			$                      5,600	$             5,600	$           11,200
Add: Utilities Payment			$                      3,000	$             3,000	$             6,000
Budgeted cash payment for S&A		$             34,400	$                    44,400	$           46,150	$         124,950
G. Cash Budget:
		Oct	Nov	Dec	Total
Beginning Balance		$             58,000	$                    26,120	$           28,000	$           58,000
Add: Cash Collected against sales		$          126,000	$                  311,500	$         389,375	$         826,875
Total Available Cash		$          184,000	$                  337,620	$         417,375	$         884,875
Less: Cash disbursment for:
Material Purchase		$          151,200	$                  210,000	$         242,930	$         604,130
Selling and Admin Budget		$             34,400	$                    44,400	$           46,150	$         124,950
Capital Expenditure		$          237,600			$         237,600
					$                   -
Total Cash Payment		$          423,200	$                  254,400	$         289,080	$         966,680
Surplus/(Deficit)		$         -239,200	$                    83,220	$         128,295	$          -81,805
Borrowing		$          268,000			$         268,000
Interest Payment 1%		$             -2,680	$                     -2,680	$            -2,155	$            -7,515
Repayment			$                   -52,540	$          -98,140	$       -150,680
Ending Balance		$             26,120	$                    28,000	$           28,000	$           28,000
H. Budgeted Income Statement:
Sales Revenue		$       1,067,500
Less: Cost of Goods Sold	60%	$          640,500
Gross Profit		$          427,000
Less: Selling and Admin Expense		$          186,925
Net Operating Income		$          240,075
Less: Interest on Short Term Note		$               7,515
Income before tax		$          232,560