Question

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. One of the partners in your practice is impressed with the work you have completed to date and would like to give you additional responsibility. She has asked you to take the lead on this engagement with the hope that a successful outcome may lead to your promotion to Senior Consultant. You take the background files from the partner and get started.

Perfect Stitch Replica’s Limited, a nationwide distributor of low-cost imitation clothing, has an exclusive agreement for the distribution of the clothing. Sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. To date, the company's budgeting practices have been minimal, and at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression and have assembled the information below.

Additional Information

The clothing is sold to retailers for an average price of $10 each. Recent and forecasted sales in units are as follows:

Recent and forecast sales:
January (actual)	20,000
February (actual)	26,000
March (actual)	40,000
April	65,000
May	100,000
June	50,000
July	30,000
August	28,000
September	25,000

Ending inventories should be equal to 40% of the next month's sales in units.

The average cost of the clothing is $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% 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 by month-end. 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.

The company's monthly operating expenses are given below:

Variable:
Sales commissions (percentage of sales)	4%
Fixed:
Advertising	$200,000
Rent	$18,000
Wages and salaries	$106,000
Utilities	$7,000
Insurance	$3,000
Depreciation	$14,000

All operating expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 is given below:

Balance Sheet at March 31:
Assets
Cash	$ 74,000
Accounts receivable*	346,000
Inventory**	104,000
Prepaid insurance	21,000
Fixed assets, net of depreciation	950,000
Total assets	$1,495,000
Liabilities and Shareholders' Equity
Accounts payable	$ 100,000
Dividends payable	15,000
Common shares	800,000
Retained earnings	580,000
Total liabilities and shareholders' equity	$ 1,495,000
Notes to Balance Sheet:
*February sales	$ 26,000
March sales	320,000
	$ 346,000
**Number of units:
Dollar amount of inventory	104,000
Divide by cost per unit	$ 4
Number of units	26,000

The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month; any repayments are made at the end of the month. The company has an agreement with a bank that allows it 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, 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 $50,000 in cash.

Prepare the following budgets for the first three months of 2016:

A sales budget by month and in total

A schedule of expected cash collections from sales, by month and in total.

A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

A schedule of expected cash disbursements for merchandise purchases, by month and in total.

A cash budget. Show the budget by month and in total.

A budgeted Income Statement for the three-month period ending June 30. Use the variable costing approach.

Provide a budgeted Balance Sheet as at June 30th.

Answer 1

1)

A sales budget by month and in total
Month	Units	Average Sale Price	Amount
April	65,000	10	650,000
May	100,000	10	1,000,000
June	50,000	10	500,000

2)

A schedule of expected cash collections from sales, by month and in total.
	From Current Month Sale	From Last month Sale	From Second Last month Sale	Total
April	130000	280000	26000	436000
May	200000	455000	40000	695000
June	100000	700000	65000	865000

3)

A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
	Opening Stock	Sales	Closing Stock (40% of next month sales	Purchase	Average Sale Price	Amount
April	26000	65000	40000	79000	4	316,000
May	40000	100,000	20000	80000	4	320,000
June	20000	50,000	12000	42000	4	168,000

4)

A schedule of expected cash disbursements for merchandise purchases, by month and in total.
	Previous Month	Current Month Purchase	Total
April	100000	158000	258000
May	158000	160000	318000
June	160000	84000	244000

5)

A cash budget. Show the budget by month and in total.
	April	May	June
Opening Cash Balance	74,000.00	50,000.00	50,000.00
Collection from sales	436,000.00	695,000.00	865,000.00
Payment to Supplier	(258,000.00)	(318,000.00)	(244,000.00)
Sales commision 4%	(26,000.00)	(40,000.00)	(20,000.00)
Advertising	(200,000.00)	(200,000.00)	(200,000.00)
Rent	(18,000.00)	(18,000.00)	(18,000.00)
Wages and salaries	(106,000.00)	(106,000.00)	(106,000.00)
Utilities	(7,000.00)	(7,000.00)	(7,000.00)
Purchase of equipment	-	(16,000.00)	(40,000.00)
Dividend	(15,000.00)	-	-
Loan from Bank	170,000.00	181,700.00	-
Loan Interest		(1,700.00)	(1,817.00)
Loan Repayment		(170,000.00)	(181,700.00)
Closing Balance	50,000.00	50,000.00	96,483.00

6)

INCOME STATEMENT
	April	May	June
Opening Stock	26000	40000	20000
Purchase	316,000	320,000	168,000
Sales	650,000	1,000,000	500,000
Closing Stock	40000	20000	12000
Gross Profit	348,000	660,000	324,000
Sales commision 4%	(26,000.00)	(40,000.00)	(20,000.00)
Wages and salaries	(106,000.00)	(106,000.00)	(106,000.00)
Utilities	(7,000.00)	(7,000.00)	(7,000.00)
Loan Interest		(1,700.00)	(1,817.00)
Depreciation	(14,000.00)	(14,000.00)	(14,000.00)
	195,000.00	493,000.00	177,000.00