Question

In: Accounting

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$19 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) 24,000 June (budget) 54,000
February (actual) 30,000 July (budget) 34,000
March (actual) 44,000 August (budget) 32,000
April (budget) 69,000 September (budget) 29,000
May (budget) 104,000

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 $6.00 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 $ 400,000
Rent $ 38,000
Salaries $ 146,000
Utilities $ 17,000
Insurance $ 5,000
Depreciation $ 34,000

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

The company plans to purchase $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 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 $ 94,000
Accounts receivable ($57,000 February sales; $668,800 March sales) 725,800
Inventory 165,600
Prepaid insurance 31,000
Property and equipment (net) 1,150,000
Total assets $ 2,166,400
Liabilities and Stockholders’ Equity
Accounts payable $ 120,000
Dividends payable 30,000
Common stock 1,200,000
Retained earnings 816,400
Total liabilities and stockholders’ equity $ 2,166,400

The company maintains a minimum cash balance of $70,000. 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 $70,000 in cash.

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

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 $70,000.

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

4. A budgeted balance sheet as of June 30.

Solutions

Expert Solution

Cash Budget uptil June end
Particulars April May June
Sales 904400 1396500 1719500
Raw Material -457800 -573000 -372000
Sales Commission -52440 -79040 -41040
Advertising -400000 -400000 -400000
Rent -38000 -38000 -38000
Salaries -146000 -146000 -146000
utilities -17000 -17000 -17000
Depreciation(not a cash
flow)
Equipment Purchased -26000 -60000
Dividend of quarter ended
march
-30000
Total Cash Flows (1) -236840 117460 645460
Add- opening Bal (2) 94000 70000 70000
equals to closing (1+2) -142840 187460 715460
Therefore loan requirement
would be 142840+70000
since minimum cash bal of
70000is to be maintained
and the cash flow for the
month of april is negative
142840
212840 Repay
187460-70000= 117460 -2128(1%interest)=115332
Repay
the balance loan
212840-117460=95380-975(1%interest)=94405
Less - Interest -2128 -975
Closing Bal 70000 70000 620080

Working Note-

  1. Sales

April= Sales were predicted to be 69000@ 19 so 69000*19=1311000 of which 20% would be received in the current month 70% in the next month and 10%following that

So therefore cash flows for the month of april are = 20%of current month 69000 + 70%of sales in march and 10% of sales in February. = 20%of 69000+ 70% of 44000 + 10% of 30000. = 13800+30800+3000= 47600units @ 19= 904400

Similarly for may = 20%of 104000+70% of 69000+10%44000= 20800+48300+4400=73500units@19=

1396500

June= 20%of 54000(june) + 70%of104000(may) + 10%69000(April)= 10800+72800+6900=90500units

90500units @19= 1719500.

Raw Material Requirement
March April May June July
Sales 44000 69000 104000 54000 34000
Current
month
44000 69000 104000 54000
40%of following
month
27600 41600 21600 13600
Less- Opening 40%of
last month
-12000 -17600 -27600 -41600
Total (raw material
requirement for the
month)
59600 93000 98000 26000
          at the rate $6 357600 558000 588000 156000
Cash flow would be
Current month 50% 279000 294000 78000
50% of last month 178800 279000 294000
TOTAL   457800 573000 372000
Sales Commisions
Particulars April May June
Sales units 69000 104000 54000
19$ *units 1311000 1976000 1026000
4% Commission 52440 79040 41040
Income uptil June end
Particulars April May June
Sales 1311000 1976000 1026000
Raw Material -414000 -624000 -324000
Sales Commission -52440 -79040 -41040
Advertising -400000 -400000 -400000
Rent -38000 -38000 -38000
Salaries -146000 -146000 -146000
Insurance -5000 -5000 -5000
utilities -17000 -17000 -17000
Depreciation(not a cash
flow)
-34000 -34000 -34000
Interest -2128 -975
Net Income$ 204560 630832 19985

Related Solutions

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT