Question

The company sells many styles of earrings, but all are sold for the same price—$14 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual)	21,600	June (budget)	51,600
February (actual)	27,600	July (budget)	31,600
March (actual)	41,600	August (budget)	29,600
April (budget)	66,600	September (budget)	26,600
May (budget)	101,600

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $4.80 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	280,000
Rent	$	26,000
Salaries	$	122,000
Utilities	$	11,000
Insurance	$	3,800
Depreciation	$	22,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets
Cash	$	82,000
Accounts receivable ($38,640 February sales; $465,920 March sales)		504,560
Inventory		127,872
Prepaid insurance		25,000
Property and equipment (net)		1,030,000
Total assets	$	1,769,432
Liabilities and Stockholders’ Equity
Accounts payable	$	108,000
Dividends payable		21,000
Common stock		960,000
Retained earnings		680,432
Total liabilities and stockholders’ equity	$	1,769,432

The company maintains a minimum cash balance of $58,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $58,000 in cash.

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $58,000.

Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available 0 0 0 0 Less cash disbursements: Merchandise purchases 0 Advertising 0 Rent 0 Salaries 0 Commissions 0 Utilities 0 Equipment purchases 0 Dividends paid 0 Total cash disbursements 0 0 0 0 Excess (deficiency) of cash available over disbursements 0 0 0 0 Financing: Borrowings 0 Repayments 0 Interest 0 Total financing 0 0 0 0 Ending cash balance $0 $0 $0 $0

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

	Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Variable expenses: 0 0 Fixed expenses: 0 0 0

4. A budgeted balance sheet as of June 30.

	Earrings Unlimited Budgeted Balance Sheet June 30 Assets Total assets $0 Liabilities and Stockholders’ Equity Total liabilities and stockholders’ equity $0

Answer 1

2)
Earnings Unlimited
Cash Budget
Particulars	April	May	June	Quarter
Beginning cash balamce	82000	58064	148288	82000
Add: Collection from customers	632800	995400	1233400	2861600
Total cash available	714800	1053464	181688	2943600
Less: Cash Disbursements
Merchandise purchases	301440	389280	300480	991200
Adverting	280000	280000	280000	840000
Rent	26000	26000	26000	78000
Salaries	122000	122000	122000	366000
Commissions	37296	56896	28896	123088
Utilities	11000	11000	11000	33000
Equipment purchases	0	20000	48000	68000
Dividende paid	21000	0	0	21000
Total cash disburements	789736	905176	816376	2520288
Excess of cash available over disbursements	-83936	148288	565312	423312
Financing:
Borrowings	142000	0	0	142000
Repayments	0	0	-142000	-142000
Interest	0	0	-4260	-4260
Total financing	142000	0	-146260	-4260
Ending cash balance	58064	148288	419052	419052
Interest = 142000*1%*3 = $4260
3)
Earnings Unlimited
Budgeted income statement
For the three months ended june 30
Sales		3077200
Less: variable expenses
Cost of goods sold	1055040
Sales commission	123088	1178128
Contribution margin		1899072
Less: Fixed expenses
Advertising	840000
Rent	78000
Salaries	366000
Itilities	33000
Insurance	11400
Depreciation	66000	1394400
Net operating income		504672
Interest expense		4260
Net income		500412
4)
Earnings Unlimited
Budgeted balance sheet
Jun-30
Assets
Cash	419052
Accounts receivable (142240+577920)	720160
Inventory	60672
Prepaid insurance	13600
Property, plant and equipment (net)	1032000
Total assets	2245484
Liabilities and stockholder's equity
Accounts payable	104640
Dividendes payable	21000
Common stock	960000
Retained earnings	1159844
Total liabilities and stockholder's equity	2245484