Question

Big Apple Sporting Goods is a retail store that sells a variety of sports equipment. The company's fiscal year ends on December 31. Information to be used for the operating budget this coming year follows.

Sales and Merchandise Purchases Budget Information

• Sales for this coming year ending December 31 are expected to be as follows: First quarter: $600,000 Second quarter: $650,000 Third quarter: $660,000 Fourth quarter: $800,000

• Cost of goods sold is 40 percent of sales (this is the first line of the merchandise purchases budget). Merchandise inventory is maintained at a level equal to 20 percent of the next quarter's cost of goods sold. Merchandise inventory at the end of the fourth quarter budget period is estimated to be $55,000.

Selling and Administrative Budget Information

• Management estimates all selling and administrative costs are fixed.

• Quarterly selling and administrative cost estimates for the coming year are: Salaries: $150,000 Rent: $25,000 Advertising: $40,000 Depreciation: $18 ,000 Other: $12,000

Capital Expenditure and Cash Budget Information

• The company plans to pay cash for property, plant, and equipment totaling $35,000 at the end of the fourth quarter. This purchase will not affect depreciation expense for the coming year.

• The company expects to collect 70 percent of sales in the quarter of sale and 30 percent the quarter following the sale. Accounts receivable at the end of last year totaled $200,000, all of which will be collected during the first quarter of this coming year.

• All inventory purchases are on credit. Big Apple Sporting Goods expects to pay 80 percent of inventory purchases in the quarter of purchase and 20 percent the following quarter. Accounts payable at the end of last year totaled $68,000, all of which will be paid during the first quarter of this coming year.

• The cash balance at the beginning of this coming year is expected to be $90,000.

Budgeted Balance Sheet Information

• Assume 30 percent of fourth quarter budgeted sales will be collected in full the following year (this represents accounts receivable at the end of the fourth quarter).

• Expected account balances at the end of the fourth quarter are: Property, plant, and equipment (net): $120 ,000 Common stock: $175,000

• Actual retained earnings at the end of the last year totaled $252,000, and no cash dividends will be paid during the current budget period ending December 31.

Required

a. Prepare a quarterly sales budget. (Hint: This budget will not have any units of product, only total sales revenue.)

b. Prepare a quarterly merchandise purchases budget using the format below. All amounts are in dollars.

c. Prepare a quarterly selling and administrative budget.

d. Prepare a quarterly budgeted income statement. (Hint: Cost of goods sold will be based on a percent of sales rather than a cost per unit.)

e. Prepare a quarterly capital expenditure budget.

f. Prepare a quarterly cash budget. (Hint: Merchandising companies have merchandise purchases rather than direct materials purchases. Merchandising companies do not have direct labor or manufacturing overhead.)

g. Prepare a budgeted balance sheet at December 31. (Hint: Merchandising companies have merchandise inventory rather than raw materials inventory or finished goods inventory.)

Answer 1

Req a) Quarterly sales budget:
					amount $
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Annual
Sales	600000	650000	660000	800000	2710000
Req b) Quarterly merchandise purchases budget:
Sales	600000	650000	660000	800000	2710000
COGS%	40%	40%	40%	40%
COGS	240000	260000	264000	320000	1084000
Add:Closing inventory	52000	52800	64000	55000	55000
Inventory required	292000	312800	328000	375000	1139000
Less: Opening inventory	48000	52000	52800	64000	48000
Expected Merchandise purchases	244000	260800	275200	311000	1091000
Req c) Quarterly selling and administration budget:
Expected S & A expenses:
Salaries	150000	150000	150000	150000	600000
Rent	25000	25000	25000	25000	100000
Advertising	40000	40000	40000	40000	160000
Depreciation	18000	18000	18000	18000	72000
Other	12000	12000	12000	12000	48000
Total Exp. S & A expenses:	245000	245000	245000	245000	980000
Less:non cash expense	18000	18000	18000	18000	72000
Cash exp. S & A expenses:	227000	227000	227000	227000	908000
Req d) Quarterly budgeted income statement:
Exp. Sales	600000	650000	660000	800000	2710000
Less: Exp. COGS	240000	260000	264000	320000	1084000
Gross Profit	360000	390000	396000	480000	1626000
Less: Exp. S & A expenses:	245000	245000	245000	245000	980000
Exp. Net Income	115000	145000	151000	235000	646000
Req e) Quarterly capital expenditure budget:
PPE	0	0	0	35000	35000
Quarterly Collection of AR:
Sales	600000	650000	660000	800000
Collections:
last qter	200000				200000
Qter 1st	420000	180000			600000
Qter 2nd		455000	195000		650000
Qter 3rd			462000	198000	660000
Qter 4th				560000	560000
Total collection	620000	635000	657000	758000	2670000
Quarterly Payment of Purchases of Merchandise:
Expected Merchandise purchases	244000	260800	275200	311000	1087000
Payment in:
last qter	68000				68000
Qter 1st	195200	48800			244000
Qter 2nd		208640	52160		260800
Qter 3rd			220160	55040	275200
Qter 4th				248800	248800
Total exp. Payments	263200	257440	272320	303840	1096800
Req f) Cash Budget:
Opening balance	90000	219800	370360	528040	90000
add : Collections	620000	635000	657000	758000	2670000
Cash available	710000	854800	1027360	1286040	2760000
Less: disbursements
Purchases	263200	257440	272320	303840	1096800
expenses	227000	227000	227000	227000	908000
capital expense				35000	35000
Total disbursements:	490200	484440	499320	565840	2039800
Closing Cash balance	219800	370360	528040	720200	720200
Req g) Expected Balance Sheet at Dec 31:
Assets:	Amount $
Cash	720200
AR	240000
Inventory	55000
Current Assets	1015200
PPE (net)	120000
Total Assets	1135200
Liabilities & SH Eq.:	Amount $
Accounts Payable	62200
Current liabilities	62200
SH. Equity:
Common Stock	175000
Retained earnings	252000
Add:net income	646000
Total Liabilities and SH Eq.	1135200