Question

Choice is a retail company that sells specialized gardening products. The company is considering opening a new store on October 1, Year1. As budget coordinator, you have been asked to prepare a master budget for the first 3 months of the company’s operation. You have gathered the following information:

October sales are estimated to be $280000 of which 60 percent will be cash and the remainder will be on credit. The company expects all sales to increase at the rate of 25 percent per month for November and December. Sales in January Year 2 are expected to be $250000.

The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale.

Prepare a sales budget and a schedule of cash receipts using these facts and your excel template. Check your answers here before moving to the next part, by completing the cells requested in the chart below.

a. Sales Budget	October	November	December	Total-Qtr
Cash sales	168000	210000	262500	640500
Sales on account	112000	140000	175000	175000
Total budgeted sales	280000	350000	437500	1067500

b. Schedule of Cash Receipts	October	November	December	Total-Qtr
Current cash sales	168000	210000	262500	640500
Plus collections from A/R	0	112000	140000	252000
Total collections	168000	322000	402500	892500

The cost of goods sold is 80 percent of sales. The company desires to maintain a minimum ending inventory equal to 30 percent of the next month’s cost of goods sold. (Ending inventory for December is based on budgeted January Year2 sales.)

Assume that all inventory purchases are made on account (on credit). The company pays 20 percent of accounts payable in the month of purchase and the remaining amount in the following month.

In excel, prepare an inventory purchases budget and a cash payments budget for inventory purchases. Use the check figures below before you continue.

c. Inventory Purchases Budget	October	November	December	Total-Qtr
Budgeted cost of goods sold	224000	280000	350000	854000
Plus desired ending inventory	84000	105000	60000	60000
Inventory needed	308000	385000	410000	914000
Less beginning inventory	0	84000	105000	0
Required purchases (on account)	308000	301000	305000	914000

d. Cash payments for inventory	October	November	December	Total-Qtr
Payment of current month's A/P	61600	60200	61000	182800
Payment for prior month's A/P	0	246400	240800	487200
Total budgeted payments	61600	306600	301800	670000

Budgeted selling and administrative expenses per month follow.

Salary expense (fixed): $ 21500

Sales commissions:  3 percent of Sales

Supplies expense:   1 percent of Sales

Utilities (fixed): $2300              

Depreciation on store equipment (fixed)*:   You compute    

Rent (fixed) $ 8000          

Miscellaneous (fixed): $ 1250      

*The capital expenditures budget indicates that the company will spend $450000 on October 1 for store fixtures, which are expected to have a $48000 residual value and a 48 month useful life.

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.

In excel, prepare the selling and administrative expenses budget and the cash payments budget for selling and administrative expenses. Check the key figures below.

e. Selling and Admin.Expense Budget	October	November	December	Total-Qtr
Salary expense
Sales commissions
Supplies expense
Utilities
Depreciation on store fixtures
Rent
Miscellaneous
Total S&A expenses

f. Cash payments for S&A	October	November	December	Total-Qtr
Salary expense
Sales commissions
Supplies expense
Utilities
Depreciation on store fixtures
Rent
Miscellaneous
Total payments for S&A expenses

Choice issued stock for 300000 on October 5. A dividend of $40000 was paid on December 15.

The company borrows and repays funds in increments of $1,000 on the last day of the month. The company also pays its vendors on the last day of the month. It pays interest of 1percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $10000 cash cushion.   

Prepare a cash budget on your excel template. Check key figure below.

g. Cash Budget	October	November	December	Total-Qtr
Beginning cash balance
Issuance of stock
Collections from customers
Cash available
Less payments
For inventory purchases
For S&A expenses
Purchase of store fixtures
Pay dividend
Interest expense
Total budgeted payments
Cash balance before borrow/repay
Financing activity
Borrowing (repayment)
Ending cash balance

ncome statement

Input expenses as negatives. Use a minus sign in front of the number.

Sales revenue
Cost of goods sold
Gross margin
S&A expenses
Operating income
Interest expense
Net income

Balance Sheet

Enter any contra-assets as negative numbers. Use a minus sign.

Assets
Cash
Accounts receivable
Inventory
Store fixtures
Accumulated depreciation
Total assets
Liabilities
Accounts payable
Utilities payable
Sales commissions payable
Line of credit liability
Total liabilities
Equity
Common stock
Retained earnings
Total equity
Total liabilities and equity

Answer 1

	A	Total Budgeted sales	$280,000	$350,000	$437,500	$1,067,500
		e. Selling and Admin.Expense Budget	October	November	December	Total-Qtr
	B	Salary expense	$21,500	$21,500	$21,500	$64,500
	C=0.03*A	Sales commissions	$8,400	$10,500	$13,125	$32,025
	D=0.01*A	Supplies expense	$2,800	$3,500	$4,375	$10,675
		Utilities	$2,300	$2,300	$2,300	$6,900
		Depreciation on store fixtures	$8,375	$8,375	$8,375	$25,125	Monthly Depreciation (450000-48000)/48				8375
		Rent	$8,000	$8,000	$8,000	$24,000
		Miscellaneous	$1,250	$1,250	$1,250	$3,750
		Total S&A expenses	$52,625	$55,425	$58,925	$166,975
		f. Cash payments for S&A	October	November	December	Total-Qtr
		Salary expense	$21,500	$21,500	$21,500	$64,500
		Sales commissions	$0	$8,400	$10,500	$18,900
		Supplies expense	$2,800	$3,500	$4,375	$10,675
		Utilities	$0	$2,300	$2,300	$4,600
		Depreciation on store fixtures	$0	$0	$0	$0
		Rent	$8,000	$8,000	$8,000	$24,000
		Miscellaneous	$1,250	$1,250	$1,250	$3,750
		Total payments for S&A expenses	$33,550	$44,950	$47,925	$126,425
		g. Cash Budget	October	November	December	Total-Qtr
		Beginning cash balance	$0	$10,000	$139,700
		Issuance of stock	$300,000
		Collections from customers	$168,000	$322,000	$402,500	$892,500
		Cash available	$468,000	$332,000	$542,200	$1,342,200
		Less payments
		For inventory purchases	$61,600	$60,200	$61,000	$182,800
		For S&A expenses	$33,550	$44,950	$47,925	$126,425
		Purchase of store fixtures	$450,000			$450,000
		Pay dividend			$40,000	$40,000
		Interest expense		$872		$872
		Total budgeted payments	$545,150	$105,150	$148,925	$799,225
		Cash balance before borrow/repay	($77,150)	$226,850	$393,275
		Financing activity
		Borrowing (repayment)	$87,150	($87,150)
		Ending cash balance	$10,000	$139,700	$393,275
		Sales revenue	$1,067,500
		Cost of goods sold	($854,000.0)	(0.8*1067500)
		Gross margin	$213,500.0
		S&A expenses	($166,975)
		Operating income	$46,525.0
		Interest expense	($872)
		Net income	$45,653.5