Question

Stew and Brew have decided to lease a new restaurant. Rent for the building will be $3,000 a month to be paid on the first day of each month. They initially invested $225,000 of their own money, which was used in part to purchase:

Furniture and equipment $180,000

China, glass, and silverware 25,200

Food inventory 9,000

Use straight-line depreciation over five years for furniture and equipment (no residual value). China, glass, and silverware are to be fully depreciated in year one. Sales are forecasted as follows for the first three months after opening:

Month 1: $48,000 Month 2: $66,000 Month 3: $84,000

Sales will be 80 percent cash and 20 percent credit with the maximum credit period allowed of 30 days. Food cost of sales is expected to average 30 percent and all purchases will be cash. Wages and salaries will be $15,000 a month. However, in any month when sales exceed $60,000, additional staff will have to be hired, and the extra wage cost is estimated to be 20 percent of any excess sales. All salaries and wages will be paid in the month during which they were earned. Other operating costs are expected to be 10 percent of sales and will be paid in the following month. At the end of month 3, Stew and Brew plan to pay themselves back part of their initial investment. This payment will be from any cash in excess of $15,000 at that time. In other words, they wish to leave only $15,000 in the restaurant’s cash account at the end of each 3 months operating quarter.

Prepare

a. A forecasted income statement for each of the three months.

b. A cash budget for each of the three months.

c. A condensed balance sheet for the first quarter at the end of month three.

Answer 1

Notes :
1	Calculation of total sales for the three month period
	Sales:
	Month 1			48000
	Month 2			66000
	Month 3			84000
	Total Sales			198000

2	Calculation of wages in Months 2 and 3
		Month 1	Month 2	Month 3
	Sales	48000	66000	84000
	Sales above which extra staffing is needed	60000	60000	60000
	Excess Sales = Sales - 60000		6000	24000
	Wage Cost	15000	15000	15000
	Additional Wages		20% of excess wages
	Additional Wages = 0.20 * Excess Sales		1200	4800
	Total Wages = Wage Cost + Additional Wages	15000	16200	19800

3	Calculation of opening cash Balance in Month 1
	Intital cash contribution		225000
	Furniture and Equipment	180000
	China glass and silverware	25200
	Food Inventory	9000
	Total Purchases = Furniture + China glass + Food inventory		214200
	Opening Cash Balance = Initial Cash Contribution - Total Purchases		10800
4	Accounts Receivable at the end of month 3 is calculated at 20% of Month 3 sales =	84000*0.20	16800

5	Accounts Payable at the end of month 3 is computed at 10% of Month 3 sales	84000*0.10	8400
6	Depreciation
	Purchase price of furniture and equipment	180000
	Salvage Value	0
	Depreciable Cost = Purchase Price - Salvage Value	180000
	Useful life	5 years
	Depreciation per year = Depreciable cost/ Useful life	15000
	Depreciation per month = Depreciation per year/12	1250
	Depreciation for 3 months = Depreciation per month * 3	3750
	Purchase price of china, glass and sliverware	25200
	Salvage Value	0
	Depreciable Cost = Purchase Price - Salvage Value	25200
	Useful life	1 year
	Depreciation per year = Depreciable cost/ Useful life	25200
	Depreciation per month = Depreciation per year/12	2100
	Depreciation for 3 months = Depreciation per month * 3	6300
	Total Depreciation per month = monthly dep of equipment + monthly dep of china, glass and silverware	3350
	Total Depreciation for 3 months = Total depreciation per month *3	10050

7	Calculation of closing Equity:
	Stew and Brew are paying them selves a part of the initial investment. This means that they are reducing the capital invested at the end of three months. Hence we need to calculate the closing equity.
	Opening Equity	225000
	Cash withdrawal in excess of 15000 (Refer cash budget)	55200
	Closing Equity = Opening Equity - Cash withdrawal above	169800
8	Total Net Income of all three months belong to the shareholders.Hence it is added to shareholder's Equity in the balance sheet

a.

Income Statement
	Month 1	Month 2	Month 3
Total Revenues	48000	66000	84000
Cash Purchases = 30% * Total Revenues	14400	19800	25200
Wages and Salaries	15000	16200	19800
Operating Costs = 10% * Total Revenues	4800	6600	8400
Total operating Costs	34200	42600	53400
Operating Profit = Total Revenues - Total operating costs	13800	23400	30600
Depreciation	3350	3350	3350
Net Income = Operating Profit - depreciation	10450	20050	27250

Cash Budget
	Month 1	Month 2	Month 3
Sales	48000	66000	84000
Opening Balance	10800	19800	41400
Income:
Cash Sales = Sales *0.80	38400	52800	67200
Collections from accounts receivable = Previous months Sales*0.2		9600	13200
				Total Revenues = Cash sales + Collections	38400	62400	80400
Expenses
Cash Purchases = Sales *0.30	14400	19800	25200
Wages and Salaries	15000	16200	19800
Operating Costs = Previous month's sales *0.10		4800	6600
Withdrawals in excess of 15000 (see note below)			55200
Total Expenses = Purchases + wages +operating costs	29400	40800	106800
Closing Balance = Opening Balance + total revenues - total expenses	19800	41400	15000

Note : Withdrawals in excess of 15000 = 41400+80400-15000-25200-19800-6600 = 55200

Balance Sheet
Assets		Liabilities and Share holder's Equity
Cash	15000	Accounts Payable	8400
Accounts Receivable	16800
Inventory	9000	Total current liabilities	8400
Total Current Assets	31800
		Shareholder's Equity:
Fixed Assets	205200	Closing share capital (refer note 7)	169800
less: Depreciation	10050	Add: Net Income	57750
Net fixed assets	195150	Total shareholder's equity	227550
Total Assets = Total Current assets + Net Fixed assets	235950	Total liabilities and shareholder's equity	235950