Question

Vernon 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 7-23A Part 1 Required October sales are estimated to be $280,000, of which 45 percent will be cash and 55 percent will be credit. The company expects sales to increase at the rate of 25 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 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $13,600. Assume that all purchases are made on account. Prepare an inventory purchases budget. 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. Budgeted selling and administrative expenses per month follow: Salary expense (fixed) $ 19,600 Sales commissions 5 % of Sales Supplies expense 2 % of Sales Utilities (fixed) $ 3,000 Depreciation on store fixtures (fixed)* $ 5,600 Rent (fixed) $ 6,400 Miscellaneous (fixed) $ 2,800 *The capital expenditures budget indicates that Vernon will spend $237,600 on October 1 for store fixtures, which are expected to have a $36,000 salvage value and a three-year (36-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. Vernon 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 1 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $28,000 cash cushion. Prepare a cash budget. Problem 7-23A 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.

Answer 1

Solution:

Sales Budget:

	October	November	December
Cash Sales (45%)	$126,000	$157,500	$196,875
Credit Sales (55%)	$154,000	$192,500	$240,625
Total Budgeted Sales	2,80,000	3,50,000	4,37,500

Schedule of Cash Receipts:

	October	November	December
Current Cash Sales	$126,000	$157,500	$196,875
Collection from accouts receivables	$0	$154,000	$192,500
Total Collections	$126,000	$311,500	$389,375

Inventory Purchase Budget:

	October	November	December
Budgeted cost of goods sold (60% of sales)	$168,000	$210,000	$262,500
Add: Desired Ending Inventory (10% of next month COGS)	$21,000	$26,250	$13,600
Inventory needed	$189,000	$236,250	$276,100
Less: Beginning Inventory	$0	($21,000)	($26,250)
Need to be Purchase on Account	$189,000	$215,250	$249,850

Cash payments budgets for Inventory Purchases:

	October	November	December
Payment of current month's accounts payable (80%)	$151,200	$172,200	$199,880
Payment of Prior month's accounts payable (20%)	$0	$37,800	$43,050
Total Budegeted Pyaments for Purchase of Inventory	$151,200	$210,000	$242,930