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Problem 14-23 Preparing a master budget for retail company with no beginning account balances LO 14-2, 14-3, 14-4, 14-5, 14-6

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Munoz Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2019. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks:

Problem 14-23 Part 1

Required

A. October sales are estimated to be $400,000, of which 45 percent will be cash and 55 percent will be credit. The company expects sales to increase at the rate of 20 percent per month. Prepare a sales budget.

B. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts.

C. The cost of goods sold is 70 percent of sales. The company desires to maintain a minimum ending inventory equal to 20 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $13,900. Assume that all purchases are made on account. Prepare an inventory purchases budget.

D. The company pays 80 percent of accounts payable in the month of purchase and the remaining 20 percent in the following month. Prepare a cash payments budget for inventory purchases.

E. Budgeted selling and administrative expenses per month follow:

Salary expense (fixed)	$	19,900
Sales commissions		4	% of Sales
Supplies expense		2	% of Sales
Utilities (fixed)	$	3,300
Depreciation on store fixtures (fixed)*	$	5,900
Rent (fixed)	$	6,700
Miscellaneous (fixed)	$	3,100

*The capital expenditures budget indicates that Munoz will spend $180,600 on October 1 for store fixtures, which are expected to have a $39,000 salvage value and a two-year (24-month) useful life.

Use this information to prepare a selling and administrative expenses budget.

F. 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. Prepare a cash payments budget for selling and administrative expenses.

G. Munoz borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 2 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $31,000 cash cushion. Prepare a cash budget.

Required A

October sales are estimated to be $400,000, of which 45 percent will be cash and 55 percent will be credit. The company expects sales to increase at the rate of 20 percent per month. Prepare a sales budget.

	October November December Sales Budget Cash sales Sales on account Total budgeted sales

Required B

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

	October November December Schedule of Cash Receipts Current cash sales Plus collections from A/R Total collections

Required C

The cost of goods sold is 70 percent of sales. The company desires to maintain a minimum ending inventory equal to 20 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $13,900. Assume that all purchases are made on account. Prepare an inventory purchases budget.

	October November December Inventory Purchases Budget Inventory needed Required purchases (on account)

Required D

The company pays 80 percent of accounts payable in the month of purchase and the remaining 20 percent in the following month. Prepare a cash payments budget for inventory purchases. (Round your final answers to the nearest whole dollar amounts.)

	October November December Schedule of Cash Payments Budget for Inventory Purchases Payment of current month's accounts payable Payment for prior month's accounts payable Total budgeted payments for inventory

Required E

Prepare a selling and administrative expenses budget.

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

Required F

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. Prepare a cash payments budget for selling and administrative expenses.

	October November December Schedule of Cash Payments for S&A Expenses Salary expense Sales commissions Supplies expense Utilities Depreciation on store fixtures Rent Miscellaneous Total payments for S&A expenses

Required G

Munoz borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 2 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $31,000 cash cushion. Prepare a cash budget. (Any repayments/shortage which should be indicated with a minus sign.)

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	Cash Budget October November December Add: Cash receipts or Less: Cash receipts? Cash available Less: Payments Total budgeted payments Payments minus receipts Financing activity

Beginning cash balance

Borrowing (repayment)

Ending cash balance

Financing activity

For inventory purchases

For selling and administrative expenses

Interest expense

Purchase of store fixtures

Surplus (shortage)

Add: Cash receipts

Less: Cash receipts

Part 2 Problem 14-23 Part 2 Prepare a pro forma income statement for the quarter. Prepare a pro forma balance sheet at the end of the quarter. Prepare a pro forma statement of cash flows for the quarter. Required H Required I Required J Prepare a pro forma income statement for the quarter. MUNOZ COMPANY Pro Forma Income Statement For the Quarter Ended December 31, 2019 Cost of goods sold Interest expense Rent expense Sales revenue Selling and administrative expenses Cost of goods sold Interest expense Rent expense Sales revenue Selling and administrative expenses Gross margin Gross loss 0 Cost of goods sold Interest expense Rent expense Sales revenue Selling and administrative expenses Operating income Operating loss 0 Cost of goods sold Interest expense Rent expense Sales revenue Selling and administrative expenses Net income Net loss $0 Prepare a pro forma balance sheet at the end of the quarter. (Amounts to be deducted should be indicated by a minus sign.) MUNOZ COMPANY Pro Forma Balance Sheet December 31, 2019 Assets 0 0 Accounts payable Accounts receivable Book value of fixtures Cash 0 0 0 Add: Accumulated depreciation Less: Accumulated depreciation Accounts payable Accounts receivable Book value of fixtures Cash Inventory Line of credit liability Retained earnings Sales commissions payable Store fixtures Utilities payable 0 Total assets $0 Liabilities Accounts payable Accounts receivable Book value of fixtures Cash Inventory Line of credit liability Retained earnings Sales commissions payable Store fixtures Utilities payable Equity Accounts payable Accounts receivable Book value of fixtures Cash Inventory Line of credit liability Retained earnings Sales commissions payable Store fixtures Utilities payable Total liabilities and equity $0

Prepare a pro forma statement of cash flows for the quarter. (Amounts to be deducted should be indicated by a minus sign.)

MUNOZ COMPANY Pro Forma Statement of Cash Flows For the Quarter Ended December 31, 2019 Cash flows from operating activities Cash payment for store fixtures Cash payments for selling and administrative expenses Cash payments for interest expense Cash payments for inventory Cash payments for rent Cash receipts from customers Ending cash balance Net inflow from line of credit Net cash flows from operating activities $0 Cash flows from investing activities Cash payment for store fixtures Cash payments for selling and administrative expenses Cash payments for interest expense Cash payments for inventory Cash payments for rent Cash receipts from customers Ending cash balance Net inflow from line of credit Cash flow from financing activities Cash payment for store fixtures Cash payments for selling and administrative expenses Cash payments for interest expense Cash payments for inventory Cash payments for rent Cash receipts from customers Ending cash balance Net inflow from line of credit Net increase in cash Net decrease in cash Plus: Beginning cash balance Less: Beginning cash balance Cash payment for store fixtures Cash payments for selling and administrative expenses Cash payments for interest expense Cash payments for inventory Cash payments for rent Cash receipts from customers Ending cash balance Net inflow from line of credit $0

Answer 1

Formula sheet

A	B	C	D	E	F	G	H	I	J	K
2
3		A)
4			October	November	December
5		Sales Budget	400000
6		Cash sales	=D5*45%
7		Sales on account	=D5*55%
8		Total budgeted sales	=D6+D7
9
10		B)
11
12			October	November	December
13		Schedule of Cash Receipts
14		Current cash sales	=D6
15		Plus collections from A/R	0
16		Total collections	=D14+D15
17
18		C)
19
20			October	November	December
21		Inventory Purchase Budget
22		Cost of Goods Sold	=D8*70%
23		Ending Inventory	13900			(Assuming ending inventory for Oct is $13,900)
24		Required Purchases	=D22+D23
25
26		D)
27			October	November	December
28		Schedule of Cash Payments Budget for Inventory Purchases
29		Payment of current month's accounts payable	=D24*80%
30		Payment for prior month's accounts payable	0
31		Total budgeted payments for inventory	=D29+D30
32
33
34		E)
35
36			October	November	December
37		Selling and Administrative Expense Budget
38		Salary expense	19900
39		Sales commissions	=D8*4%
40		Supplies expense	=D8*2%
41		Utilities	3300
42		Depreciation on store fixtures	5900
43		Rent	6700
44		Miscellaneous	3100
45		Total S&A expenses	=SUM(D38:D44)
46