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Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows:

Endless Mountain Company
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash	$	46,200
Accounts receivable (net)		260,000
Raw materials inventory (4,500 yards)		11,250
Finished goods inventory (1,500 units)		32,250
Total current assets				$	349,700
Plant and equipment:
Buildings and equipment		900,000
Accumulated depreciation		(292,000	)
Plant and equipment, net					608,000
Total assets				$	957,700
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable				$	158,000
Stockholders’ equity:
Common stock	$	419,800
Retained earnings		379,900
Total stockholders’ equity					799,700
Total liabilities and stockholders’ equity				$	957,700

The company’s chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units.

All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

Each quarter’s ending finished goods inventory should equal 15% of the next quarter’s unit sales.

Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter’s ending raw materials inventory should equal 10% of the next quarter’s production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 yards.

Seventy percent of each quarter’s purchases are paid for in the quarter of purchase. The remaining 30% of each quarter’s purchases are paid in the following quarter.

Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred.

The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company’s lender imposes a simple interest rate of 3% per quarter on any borrowings.

Dividends of $15,000 will be declared and paid in each quarter.

The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the “first-out” to production and the most recently completed finished goods are the “first-out” to customers.

Required:

1. Using the indirect method, calculate Endless Mountain Company’s estimated net cash provided by operating activities for 2017.

2. Prepare the company’s budgeted statement of cash flows for the year ended December 31, 2017.

Answer 1

Sales Budget
	Q1	Q2	Q3	Q4	Total
Budgeted Unit Sales	12000	37000	15000	25000	89000
Budgeted Selling price	32	32	32	32	32
Budgeted Sales	384000	1184000	480000	800000	2848000
Schedule of collections:
	Q1	Q2	Q3	Q4	Total
December 2016 receivables	260000				260000
Q1 sales	288000	96000			384000
Q2 Sales		888000	296000		1184000
Q3 Sales			360000	120000	480000
Q4 Sales				600000	600000
Total Cash Collections	548000	984000	656000	720000	2908000
Receivables	96000	296000	120000	200000	200000
(b) Production Budget
	Q1	Q2	Q3	Q4	Total
Budgeted unit sales	12000	37000	15000	25000	89000
Plus: Desired ending inventory	5550	2250	3750	1950	1950
Total Units needed	17550	39250	18750	26950	90950
Less: Beginning inventory	1500	5550	2250	3750	1500
Budgeted production units	16050	33700	16500	23200	89450
(c) Direct material budget
	Q1	Q2	Q3	Q4	Total
Budgeted production units	16050	33700	16500	23200	89450
yards per unit of production	3.5	3.5	3.5	3.5	3.5
Total yards required for production	56175	117950	57750	81200	313075
Plus: Desired ending inventory	11795	5775	8120	5000	5000
Total yards neded	67970	123725	65870	86200	318075
Less: Beginning inventory	4500	11795	5775	8120	4500
Budgeted purchases -- pounds	63470	111930	60095	78080	313575
Cost per yard - $	3	3	3	3	3
Budgeted purchases - $	190410	335790	180285	234240	940725
Schedule of payments for raw materials
	Q1	Q2	Q3	Q4	Total
December purchases	18000				18000
Q1 purchases	133287	57123			190410
Q2 purchases		235053	100737		335790
Q3 purchases			126200	54086	180285
Q4 purchases				163968	163968
Total payments for raw material	151287	292176	226937	218054	888453
Accounts Payable	57123	100737	54086	70272	70272
(d) Direct labor budget
	Q1	Q2	Q3	Q4	Total
Budgeted production units	16050	33700	16500	23200	89450
Direct labor hours per unit	0.25	0.25	0.25	0.25	0.25
Direct labor hours for production	4013	8425	4125	5800	22363
Direct labor rate per hour - $	18	18	18	18	18
Budgeted direct labor cost	72225	151650	74250	104400	402525
(e) Manufacturing overheads budget
	Q1	Q2	Q3	Q4	Total
Budgeted direct labor hours	4013	8425	4125	5800	22363
Variable manufacturing overhead per hour	3	3	3	3	3
Variable manufacturing overheads	12038	25275	12375	17400	67088
Fixed manufacturing overhead	150000	150000	150000	150000	600000
Total manufacturing overheads	162038	175275	162375	167400	667088
Depreciation	20000	20000	20000	20000	80000
Cash payment for manufacturing overhrads	142038	155275	142375	147400	587088
(f) Selling and administrative expenses
	Q1	Q2	Q3	Q4	Total
Variable selling and adn.expenses($1.25 per unit sold)	12000	37000	15000	25000	89000
Fixed selling and adn. Expenses
Advertising	25000	25000	25000	25000	100000
Insurance	12000	12000	12000	12000	48000
Salaries	64000	64000	64000	64000	256000
Depreciation	8000	8000	8000	8000	32000
Property taxes	8000	8000	8000	8000	32000
Total selling and admn.expenses	117000	117000	117000	117000	468000
Cash payment for S&A expenses	109000	109000	109000	109000	436000
BUDGETED INCOME STATEMENT
Sales Revenue	2848000
Cost of goods sold	1994963
Gross profit	853038
Selling and admn. Expenses
Variable expenses	89000
Advertising	100000
Insurance	48000
Salaries	256000
Depreciation	32000
Property taxes	32000
Total Selling and admn.expenses	557000
Net income	296038
	Units	Cost/unit	Value
Beginning raw materials	4500	2.5	11250
Purchases			940725
Total raw material available			951975
Ending raw material	5000	3	15000
Raw material used for production			936975
Direct labor			402525
Manufacturing overhead			667088
Total manufacturing cost			2006588
Production - units			89450
Cost per unit			22.43
Beginning Inventory of finished goods	1500	21.5	32250
Cost of manufacture			2006588
Goods available for sale			2038838
Ending inventory of finished goods	1950	22.5	43875
Cost of goods sold			1994963