Question

Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows:

Endless Mountain Company
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash	$	46,200
Accounts receivable (net)		260,000
Raw materials inventory (4,500 yards)		11,250
Finished goods inventory (1,500 units)		32,250
Total current assets				$	349,700
Plant and equipment:
Buildings and equipment		900,000
Accumulated depreciation		(292,000	)
Plant and equipment, net					608,000
Total assets				$	957,700
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable				$	158,000
Stockholders’ equity:
Common stock	$	419,800
Retained earnings		379,900
Total stockholders’ equity					799,700
Total liabilities and stockholders’ equity				$	957,700

The company’s chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units.

All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

Each quarter’s ending finished goods inventory should equal 15% of the next quarter’s unit sales.

Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter’s ending raw materials inventory should equal 10% of the next quarter’s production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 yards.

Seventy percent of each quarter’s purchases are paid for in the quarter of purchase. The remaining 30% of each quarter’s purchases are paid in the following quarter.

Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred.

The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company’s lender imposes a simple interest rate of 3% per quarter on any borrowings.

Dividends of $15,000 will be declared and paid in each quarter.

The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the “first-out” to production and the most recently completed finished goods are the “first-out” to customers.

Integration Exercise 10 Statement of Cash Flows [LO 14-1, LO 14-2]

Required:

1. Using the indirect method, calculate Endless Mountain Company’s estimated net cash provided by operating activities for 2017.

2. Prepare the company’s budgeted statement of cash flows for the year ended December 31, 2017.

Answer 1

To answer this question, we will derive various cash inflows and outflows using the data provided.

Q1 2018 data is for deriving 2017 values. The numbers are rough working and not part of the main answer.

1. Sales:

Sales	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018
Sales qty	12,000	37,000	15,000	25,000	13,000
Sales amt	384,000	1,184,000	480,000	800,000	416,000
Cash Sales	288,000	888,000	360,000	600,000	312,000
Credit sales	96,000	296,000	120,000	200,000	104,000

Note : Sales amount recovered in the same quarter has been shown as cash sales (75%).

2. Debtors:

Debtors	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018
Opening	260,000	96,000	296,000	120,000	200,000
Credit Sales	96,000	296,000	120,000	200,000	104,000
Collection	260,000	96,000	296,000	120,000	200,000
Closing	96,000	296,000	120,000	200,000	104,000

Opening debtor has been treated as last quarter's credit sale.

3. Finished Goods inventory:

FG inventory	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018
Opening	1,500	5,550	2,250	3,750	1,950
Sales	12,000	37,000	15,000	25,000	13,000
Closing	5,550	2,250	3,750	1,950
Production	16,050	33,700	16,500	23,200	11,050

Here the sales quantity (as provided above) and closing stock (i.e. 15% of next quarter sale) has been used to derive Production numbers.

4. Raw material inventory:

RM inventory	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018
Opening	4,500	11,795	5,775	8,120	5,000
Consumption	56,175	117,950	57,750	81,200	38,675
Closing	11,795	5,775	8,120	5,000	-
Purchase qty	63,470	111,930	60,095	78,080	33,675

Consumption is the quantity of raw material required for production of finished goods (calculated above). Consumption = Production * 3.5

Closing quantity = Next quarter production * 3.5 * 10%

Through above, purchased quantity has been derived.

5. Purchases:

Purchases	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018
Cash Purchases	133,287	235,053	126,200	163,968	70,718
Credit purchases	57,123	100,737	54,086	70,272	30,308

Purchase = Purchase quantity * 3 per unit

6. Creditors:

Creditors	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018
Opening	158,000	57,123	100,737	54,086	70,272
Purchases	57,123	100,737	54,086	70,272	30,308
Payments	158,000	57,123	100,737	54,086	70,272
Closing	57,123	100,737	54,086	70,272	30,308

Similar to debtors, cash payments are last quarters credit purchases. Opening creditor has been considered as last period credit pruchases.

7. Other expenses:

Other	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018
Labour paid	72,225	151,650	74,250	104,400	49,725
Variable O/H	12,038	25,275	12,375	17,400	8,288
Fixed O/H	130,000	130,000	130,000	130,000	130,000
Variable Selling	15,000	46,250	18,750	31,250	16,250
Fixed Selling	109,000	109,000	109,000	109,000	109,000

Depreciation is not a cash expense and hence, has been excluded.

8. Cash:

Cash	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018
Opening	46,200	30,000	244,649	314,338	409,234
Receipts:
Sales	288,000	888,000	360,000	600,000	312,000
Debtors	260,000	96,000	296,000	120,000	200,000
Payments:
Purchases	133,287	235,053	126,200	163,968	70,718
Creditors	158,000	57,123	100,737	54,086	70,272
Labour	72,225	151,650	74,250	104,400	49,725
Variable O/H	12,038	25,275	12,375	17,400	8,288
Fixed O/H	130,000	130,000	130,000	130,000	130,000
Variable Selling	15,000	46,250	18,750	31,250	16,250
Fixed Selling	109,000	109,000	109,000	109,000	109,000
Dividend	15,000	15,000	15,000	15,000	15,000
Net cash	(50,350)	244,649	314,338	409,234	451,982
Borrowing	80,350			(80,350)
Interest				(9,642)
Closing	30,000			319,243

In Q1, the cash balance turns out to be -50,350 and minimum cash required is 30,000. Therefore, it is assumed, a borrowing of 80,350 will be made in the begining of Q1 2017.

The question states "the company will repay principal and interest on any borrowings on the last day of the fourth quarter", therefore, the cash outflow of borrowed cash and interest has been shown in Q4 2017.