Question

Summer Breeze Inc. (SBI) is a retail outlet specializing in equipment and apparel for the summer months. SBI is trying to prepare a comprehensive budget for the first quarter of 2018. SBI has accumulated the following data:

Balance Sheet as of December 31, 2017			(Actual Values)
Assets			Liabilities and Equity
Cash	$ 25,000		Accounts Payable	$ 40,000
Accounts Receivable	75,000		Other Payables	28,200
Inventory	22,000		Common Stock	400,000
Fixed Assets, net	500,000		Retained Earnings	153,800
Total Assets	$622,000			$622,000

SBI sales are seasonal, growing through June and then declining through the rest of the year.

December 2017 sales were $200,000. November 2017 sales were $150,000.

Cost of goods sold is 76% of sales.

Fixed Selling, General & Administrative Expenses are $50,000 per month. Variable selling expenses (commissions) are 10% of sales. SG&A are paid in the month incurred. Commissions are paid the following month.

Depreciation is $60,000 annually.

Other Payables on the December 31, 2017 Balance Sheet includes Taxes Payable - $8,200 and Commissions Payable - $20,000.

The Income Tax rate is 40%. Taxes are paid the month after they are incurred.

SBI’s inventory policy is to maintain enough inventory to meet 20% of next month’s sales.

Sales are collected 70% in the current month, 20% in the month after sale and 10% in the second month after sale.

Purchases are paid 75% in the month of purchase and 25% in the month after purchase.

SBI has a line of credit with a local bank. The line of credit has a $200,000 limit and 6% rate. Borrowings are made on the last day of the month. Interest Expense is recognized the following month. Interest is paid the month after the expense is recognized.

SBI’s policy is to maintain a minimum cash balance of $10,000

SBI pays a $500 dividend to its shareholders each month.

Projected sales are as follows:

Sales Budget	January	February	March	April	May
Sales	$400,000	$700,000	$1,200,000	$1,250,000	$1,375,000

Use the information above to prepare SBI’s comprehensive budget for the first quarter of 2018. SBI’s budgets follow the format on the following pages. Round all balances to the nearest dollar.

Master Budget (Continued)

Summer Breeze Inc. Budget Template

Budgeted Income Statement	January	February	March	Totals
Sales
Variable Costs: Cost of Goods Sold
Commissions
Contribution Margin
Fixed S,G&A Expenses
Depreciation
Income Before Interest
Interest Expense
Income Before Tax
Tax Expense
Net Income

Purchases Budget	January	February	March	Totals
Cost of Goods Sold
Desired Ending Inventory
Total Needs
Beginning Inventory
Total Purchases

Cash Receipts Budget	January	February	March	Totals
Sales
Cash Collections:      Current Month
1 Month Prior
2 Months Prior
Total Collections
Cash Disbursements	January	February	March	Totals
Purchases
Payments for Purchases:    Current Month
1 Month Prior
SG&A Expenses Paid
Commissions Paid
Interest Paid
Taxes Paid
Dividends Paid
Total Disbursements

Master Budget (Continued)

Summer Breeze Inc. Budget Template

Cash Budget	January	February	March	Totals
Cash Receipts
Cash Disbursements
Excess/(Deficiency) of Cash
Beginning Balance
Projected Ending Balance
Borrowing/(Repayments) on Line of Credit
Ending Cash Balance

Balance Sheet as of March 31, 2018
Assets			Liabilities and Equity
Cash			Accounts Payable
Accounts Receivable			Commissions Payable
Inventory			Taxes Payable
			Interest Payable
			Notes Payable (Line of Credit)
Fixed Assets, net			Common Stock
			Retained Earnings
Total Assets			Total Liabilities & Equity

Required: Create SBI’s master budget using an Excel spreadsheet that follows the format above. Only the professionally completed budget is required

Answer 1

Budgeted Income Statement	January	February	March	Total
Sales	400000	700000	1200000	2300000
Variabe costs:
Cost of goods sold	304000	532000	912000	1748000
Commission	40000	70000	120000	230000
Contribution margin	56000	98000	168000	322000
Fixed S,G&A Expenses	50000	50000	50000	150000
Depreciation	5000	5000	5000	15000
Income before interest	1000	43000	113000	157000
Interest expense	0	426	828	1254
Income Before Tax	1000	42574	112172	155746
Tax Expense	400	17030	44869	62299
Net Income	600	25544	67303	93447

Note: Interest for Feb is on borrowings in Jan. Interest for March is on borrowings in Jan & Feb.

Purchase Budget	January	February	March	Total
Cost of Goods Sold	304000	532000	912000	1748000
Desired Ending Inventory	140000	240000	250000	630000
Total Needs	444000	772000	1162000	2378000
Beginning Inventory	22000	140000	240000	402000
Total Purchases	422000	632000	922000	1976000

Cash Receipts Budget	January	February	March	Total
Sales	400000	700000	1200000	2300000
Cash Collections:
Current Month	280000	490000	840000	1610000
1 Month Prior	40000	80000	140000	260000
2 Months Prior	15000	20000	40000	75000
Total Collections	335000	590000	1020000	1945000

Cash Disbursements	January	February	March	Totals
Purchases	422000	632000	922000	1976000
Payments for Purchases:
Current Month	316500	474000	691500	1482000
1 Month Prior	40000	105500	158000	303500
SG&A Expenses Paid	50000	50000	50000	150000
Commissions Paid	20000	40000	70000	130000
Interest Paid	0	0	426	426
Taxes Paid	8200	400	17030	25630
Dividends Paid	500	500	500	1500
Total Disbursements	435200	670400	987456	2093056

Cash Budget	January	February	March	Totals
Cash Receipts	335000	590000	1020000	1945000
Cash Disbursements	435200	670400	987456	2093056
Excess/(Deficiency) of Cash	(100200)	(80400)	32544	(148056)
Beginning Balance	25000	10000	10000	45000
Projected Ending Balance	10000	10000	10000	30000
Borrowing/(Repayments) on Line of Credit	85200	80400	(32544)	133056
Ending Cash Balance	10000	10000	10000	30000

Balance Sheet as of March 31, 2018
Assets		Liabilities and Equity
Cash	10000	Accounts Payable	230500
Accounts Receivable	430000	Commissions Payable	120000
Inventory	250000	Taxes Payable	44869
		Interest Payable	828
		Notes Payable (Line of Credit)	133056
Fixed Assets, net	485000	Common Stock	400000
		Retained Earnings	245747
Total Assets	1175000	Total Liabilities & Equity	1175000