Question

Blooms Enterprise Project

Blooms Enterprise is a retail company that sells household electronics. The budget for the forthcoming period January to March 2021 is to be prepared. Expectations for the forthcoming period include the following:

1. Expected Statement of Financial Position as at 31 December 2020

	$	$
ASSETS
Non-current Assets
Property Plant and Equipment (NBV)		1,344,500
Current Assets
Inventory	346,500
Accounts Receivable	126,000
Marketable securities	30,000
Cash	353,000	855,500
		2,200,000
EQUITIES AND LIABILIATIES
Capital
Share capital		1,000,000
Accumulated profits		216,200
		1,216,200
Current Liabilities
Accounts Payable	396,900
10% Bond Payable	586,900	983,800
		2,200,000

2. Sales data – the company’s sales for December 2020 are expected to be $900,000 and it is expected that it will increase by 10% each month over the previous month for the quarter ending March 31, 2021. Sales are expected to remain constant at March 31, 2021 level for the next three months.

3. Collections – credit sales are typically 70% of total sales. Outstanding amounts from sales are normally collected as follows:

1. 80% during the month of sale
2. 20% during the month after sale

4. Cost of goods sold – this is normally 70% of total sales. To have adequate stocks of inventory on hand, the company attempts to have inventory at the end of each month equal to half (50%) of the next month’s projected cost of goods sold. Inventory is purchased on account and usually settled as follows:

1. 40% during the month of purchase
2. 60% during the month after purchase

5. Other monthly expenses:

Expense type	$
Salaries	100,000
Advertising and promotion	25,000
Depreciation	60,000
Sales commission	2% of total sales

6. Equipment is to be purchased on January 1, 2021 for cash in the amount of $700,000.

7. The directors have indicated an intention to declare and pay dividends of $120,000 on the last day of each quarter.

8. The executives believe that the company should maintain a minimum cash balance of $60,000. If the cash balance in any month is less than $60,000, then the company can borrow to cover the shortfall. Amounts borrowed must be in multiples of $1,000 (for example, $50,000 or $51,000 but not $51,500 or 51,566). The interest rate is 10% per annum. Repayment of principal and interest must be made on the last day of each quarter.

1. Tax payable represents 20% of Profit before Tax and will be paid April 30, 2021 (after the end of the first quarter).

Required:

Prepare the following budgets for Blooms Enterprise by month and the quarter in total for the period ending March 31, 2021:

1. Schedule showing breakdown of sales between cash and credit (Hint: show December 2020 and April 2021 as well).                                                                            

2. Schedule of cash collected from customers.                                                              

3. Purchases budget (Hint: show April 2021 as well).                                            

4. Schedule of cash disbursement to suppliers of products for resale.                        

5. Cash budget for the period.                                                                               

Answer 1

a.

		Schedule of Sales
	January	February	March	Total
Expected sales	990,000	1,089,000	1,197,900	3,276,900
Cash sales	297,000	326,700	359,370	983,070
Credit sales	693,000	762,300	838,530	2,293,830

b.

		Schedule of Cash Collection from Customers
	January	February	March	Total
Cash sales	297,000	326,700	359,370	983,070
Accounts rceivable	126,000			126,000
January credit sales	554,400	138,600		693,000
February credit sales		609,840	152,460	762,300
March credit sales			670,824	670,824
Total cash collections	977,400	1,075,140	1,182,654	3,235,194

c.

		Purchases Budget
	January	February	March	Total	April
Cost of Goods Sold	693,000	762,300	838,530	2,293,830	838,530
Add: Desired Ending Inventory	381,150	419,265	419,265	419,265	419,265
Total Needs	1,074,150	1,181,565	1,257,795	2,713,095	1,257,795
Less: Beginning Inventory	346,500	381,150	419,265	346,500	419,265
Budgeted Cost of Purchases	727,650	800,415	838,530	2,366,595	838,530

d.

		Schedule of Cash Disbursements to Suppliers
	January	February	March	Total
Accounts payable	396,900			396,900
January purchases	291,060	436,590		727,650
February purchases		320,166	480,249	800,415
March purchases			335,412	335,412
Total cash disbursements	687,960	756,756	815,661	2,260,377

e.

		Cash Budget
		For the three months ended March 31, 2021
	January	February	March	Total
Beginning cash balance	$ 353,000	$ 60,640	$ 232,244	$ 353,000
Add: Cash collected from customers	977,400	1,075,140	1,182,654	3,235,194
Total cash available	1,330,400	1,135,780	1,414,898	3,588,194
Less: Cash disbursements
Suppliers of inventory	687,960	756,756	815,661	2,260,377
Salaries	100,000	100,000	100,000	300,000
Advertising and promotion	25,000	25,000	25,000	75,000
Sales commission	19,800	21,780	23,958	65,538
Purchase of equipment	700,000	0	0	700,000
Cash dividends	0	0	120,000	120,000
Total cash disbursements	1,532,760	903,536	1,084,619	3,520,915
Cash surplus ( decifiency) of cash available over cash disbursements	(202,360)	232,244	330,279	67,279
Financing
Borrowing	263,000			263,000
Repayment			263,000	(263,000)
Interest			6,575	(6,575)
Total Financing	263,000	263,000	0
Ending cash balance	60,640	232,244	60,704	60,704