Question

Summer Breeze Inc. (SBI) is a retail outlet specializing in equipment and apparel for the summer months. SBI is trying to prepare a comprehensive budget for the first quarter of 2018. SBI has accumulated the following data:

Balance Sheet as of December 31, 2017			(Actual Values)
Assets			Liabilities and Equity
Cash	$ 25,000		Accounts Payable	$ 40,000
Accounts Receivable	75,000		Other Payables	28,200
Inventory	22,000		Common Stock	400,000
Fixed Assets, net	500,000		Retained Earnings	153,800
Total Assets	$622,000			$622,000

SBI sales are seasonal, growing through June and then declining through the rest of the year.

December 2017 sales were $200,000. November 2017 sales were $150,000.

Cost of goods sold is 76% of sales.

Fixed Selling, General & Administrative Expenses are $50,000 per month. Variable selling expenses (commissions) are 10% of sales. SG&A are paid in the month incurred. Commissions are paid the following month.

Depreciation is $60,000 annually.

Other Payables on the December 31, 2017 Balance Sheet includes Taxes Payable - $8,200 and Commissions Payable - $20,000.

The Income Tax rate is 40%. Taxes are paid the month after they are incurred.

SBI’s inventory policy is to maintain enough inventory to meet 20% of next month’s sales.

Sales are collected 70% in the current month, 20% in the month after sale and 10% in the second month after sale.

Purchases are paid 75% in the month of purchase and 25% in the month after purchase.

SBI has a line of credit with a local bank. The line of credit has a $200,000 limit and 6% rate. Borrowings are made on the last day of the month. Interest Expense is recognized the following month. Interest is paid the month after the expense is recognized.

SBI’s policy is to maintain a minimum cash balance of $10,000

SBI pays a $500 dividend to its shareholders each month.

Projected sales are as follows:

Sales Budget	January	February	March	April	May
Sales	$400,000	$700,000	$1,200,000	$1,250,000	$1,375,000

Use the information above to prepare SBI’s comprehensive budget for the first quarter of 2018. SBI’s budgets follow the format on the following pages. Round all balances to the nearest dollar.

Answer 1

Comprehensive budget
Particulars	Jan	Feb	Mar
Sales	$400,000	$700,000	$1,200,000
COGS	$304,000	$532,000	$912,000
Gross profit	$96,000	$168,000	$288,000
Fixed selling & Admin expenses	$50,000	$50,000	$50,000
Commissions	$40,000	$70,000	$120,000
Depreciation	$60,000	$60,000	$60,000
Interest	$0	$0	$0
PBT	-$54,000	-$12,000	$58,000
Income tax	$0	$0	$23,200
PAT	-$54,000	-$12,000	$34,800
Working Note
Cash budget
Particulars	Nov'17	Dec'17	Jan'18	Feb'18	March'18	April'18	May'18
Sales	$150,000	$200,000	$400,000	$700,000	$1,200,000	$1,250,000	$1,375,000
Commissions	$15,000	$20,000	$40,000	$70,000	$120,000	$125,000	$137,500
Inventory Purchases	$40,000	$80,000	$140,000	$240,000	$250,000	$275,000	$0
Opening Cash Balance			$25,000	$156,300	$440,800
Sales collection (70% of current month)	$105,000	$140,000	$280,000	$490,000	$840,000	$875,000	$962,500
Sales collection (20% in following month)		$30,000	$40,000	$80,000	$140,000	$240,000	$250,000
Sales collection (10% in second month after sale)			$15,000	$20,000	$40,000	$70,000	$120,000
SG&A	$50,000	$50,000	$50,000	$50,000	$50,000	$50,000	$50,000
Commissions		$15,000	$20,000	$40,000	$70,000	$120,000	$125,000
Income tax			$8,200
Inventory purchase (75% in the current month)	$30,000	$60,000	$105,000	$180,000	$187,500	$206,250	$0
Inventory purchase (25% in the following month)		$10,000	$20,000	$35,000	$60,000	$62,500	$68,750
Dividend	$500	$500	$500	$500	$500	$500	$500
			$156,300	$440,800	$1,092,800