Question

Thornton 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:

Required

October sales are estimated to be $400,000, of which 40 percent will be cash and 60 percent will be credit. The company expects sales to increase at the rate of 30 percent per month. Prepare a sales budget.

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.

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 $13,500. Assume that all purchases are made on account. Prepare an inventory purchases budget.

The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the following month. Prepare a cash payments budget for inventory purchases.

Budgeted selling and administrative expenses per month follow:

Salary expense (fixed)	$	19,500
Sales commissions		4	% of Sales
Supplies expense		2	% of Sales
Utilities (fixed)	$	2,900
Depreciation on store fixtures (fixed)*	$	5,500
Rent (fixed)	$	6,300
Miscellaneous (fixed)	$	2,700

*The capital expenditures budget indicates that Thornton will spend $167,000 on October 1 for store fixtures, which are expected to have a $35,000 salvage value and a two-year (24-month) useful life.

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

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.

Thornton 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 $27,000 cash cushion. Prepare a cash budget.

Thornton 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:

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.

Answer 1

Sales Budget
	October	November	December
Sales	$      400,000.00	$          520,000.00	$       676,000.00
Cash Sales	$      160,000.00	$          208,000.00	$       270,400.00
Credit Sales	$      240,000.00	$          312,000.00	$       405,600.00

Schedule of Cash Receipts
	October	November	December	Receivable at the end of December
Cash Sales	$      160,000.00	$          208,000.00	$       270,400.00
Cash Received Against Previous Month Credit Sales	$                        -	$          240,000.00	$       312,000.00
Total Cash Receipts	$      160,000.00	$          448,000.00	$       582,400.00	$                   405,600.00

Inventory Purchases Budget
	October	November	December
Opening Inventory	$                        -	$            72,800.00	$         94,640.00
Purchases (balancing Figure)	$      352,800.00	$          385,840.00	$       390,660.00
Closing Inventory Needed	$        72,800.00	$            94,640.00	$         12,100.00

Cash Payment Budget for Inventory Purchases
	October	November	December	Payable In January
Purchases	$      352,800.00	$          385,840.00	$       390,660.00
Payment of 70% in same Month	$      246,960.00	$          270,088.00	$       273,462.00
Payment Of 20% in Next Month	$                        -	$          105,840.00	$       115,752.00	$                   117,198.00
Total Cash Paid	$      246,960.00	$          375,928.00	$       389,214.00

Selling and Administrative expenses Budget
	October	November	December
Selling Expenses
Sales Commission	$        16,000.00	$            20,800.00	$         27,040.00
Administrative Expenses
Salary Expenses	$        19,500.00	$            19,500.00	$         19,500.00
Supplies Expenses	$           8,000.00	$            10,400.00	$         13,520.00
Utilities	$           2,900.00	$              2,900.00	$          2,900.00
Depreciation on stores Fixtures	$           5,500.00	$              5,500.00	$           5,500.00
Reny	$           6,300.00	$              6,300.00	$           6,300.00
Miscelanious	$           2,700.00	$              2,700.00	$           2,700.00
Total Expenses	$        60,900.00	$            68,100.00	$         77,460.00

Cash Payment Budget for Selling and Administrative Expenses
	October	November	December	Payable in January
Selling expenses
Sales Commission	0	$      16,000.00	$      20,800.00	$                27,040.00
Administrative Expenses
Salary Expenses	$      19,500.00	$      19,500.00	$      19,500.00
Supplies Expenses	$        8,000.00	$      10,400.00	$      13,520.00
Utilities	0	$        2,900.00	$        2,900.00	$                  2,900.00
Reny	6300	6300	6300
Miscelanious	2700	2700	2700
Total Expenses Paid in Cash	$      36,500.00	$      57,800.00	$      65,720.00

Cash Budget

Cash Budget	October	November	December
Opening Balance	$                     -	$      27,000.22	$      27,000.22
Fund Borrowed	$    323,939.00	$                     -
Receipts from Customers	$    160,000.00	$    448,000.00	$    582,400.00
Total (A)	$    483,939.00	$    475,000.22	$    609,400.22
Investment on Fixtures	$    167,000.00
Paid for Putchases	$    246,960.00	$    375,928.00	$    389,214.00
Paid for selling and Administrative expenses	$      36,500.00	$      57,800.00	$      65,720.00
Interest on Loan Paid In cash	$        6,478.78	$        6,478.78	$        6,322.91
Repayment of Loan	$                     -	$        7,793.44	$    121,143.31
Total paid (B)	$    456,938.78	$    448,000.22	$    582,400.22
Closing Balance (C=A-B)	$      27,000.22	$      27,000.00	$      27,000.00

Thornton Company
Proforma Balance Sheet For Quarter Ended December
Assets
Accounts Receivable	$            405,600
Closing Stock	$              12,100
Fixed Assets (Store Fixtures)	$            150,500
Cash	$              27,000
Total Assets	$            595,200
Liabilities
Bank Overdraft	$            195,002
Accounts Payables	$            117,198
Expenses Payable	$              29,940
Shareholder's Funds (equity)	$            253,060
Total Liabilities	$            595,200

Thornton Company
Proforma Statement of cash flow
for the Quarter ended December 31st
Cash from Operating Activities
Inflow from revenue			$             253,060
Adjustment for			$                        -
Depreciation			$               16,500
Icrease In Accounts Receivables			$          (405,600)
Increase in Inventory			$             (12,100)
Icrease In Accounts Payable			$             117,198
Increase in Accrued Expenses			$               29,940
(A)Net outflow from Operating Activities			$               (1,002)
Cash flow from Investing Activities
Purchase of Fixtures		$                167,000
(B)Net outflow from Investing Activities			$          (167,000)
Cash Flow from Financing Activities (net)
Proceeds from Loan			$             195,002
(C )Net Inflow from Financing Activities			$                        -
(A+B+C) Cash Generated During Year			$               27,000
Beginning cash Balance			$                        -
Closing cash balance			$               27,000

Thornton Company
Pro forma Income Statement For Quarter Ended December
Revenue	$        1,596,000
Less-Purchases	$        1,129,300
Add-Closing Stock	$              12,100
Gross Profit	$            478,800
Less Expenses	$            225,740
Net Profit	$            253,060