Question

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 benefits that can be gained from an integrated budgeting program. 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—$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)	20,900	June (budget)	50,900
February (actual)	26,900	July (budget)	30,900
March (actual)	40,900	August (budget)	28,900
April (budget)	65,900	September (budget)	25,900
May (budget)	100,900

   

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 30% of the earrings sold in the following month.

   

Suppliers are paid $8 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, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 60% is collected in the following month, and the remaining 20% 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	$	199,100
Rent	$	17,100
Salaries	$	105,100
Utilities	$	6,100
Insurance	$	2,100
Depreciation	$	13,100

    

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

The company plans to purchase $15,300 in new equipment during May and $39,100 in new equipment during June; both purchases will be for cash. The company declares dividends of $10,500 each quarter, payable in the first month of the following quarter.

A listing of the company's ledger accounts as of March 31 is given below:

    

Assets			Liabilities and Stockholders' Equity
Cash	$	150,000	Accounts payable	$	193,600
Accounts receivable ($75,320 February      sales; $458,080 March sales)		533,400	Dividends payable		10,500
Inventory		158,160	Capital stock		890,000
Prepaid insurance		21,900	Retained earnings		589,000
Property and equipment (net)		819,640
Total assets	$	1,683,100	Total liabilities and stockholders' equity	$	1,683,100

   

The company maintains a minimum cash balance of $30,000. 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 $30,000 in cash.

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

    

Requirement 2:

A cash budget. Show the budget by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Input all amounts as positive values except deficiencies, repayments and interest which should be preceded by a minus sign when appropriate. Total financing should be preceded by a minus sign when it consist of repayments and interest. Omit the "$" sign in your response.)

    

EARRINGS UNLIMITED Cash Budget For the Three Months Ending June 30
	April		May		June		Quarter
Total cash available	$		$		$		$
Less disbursements:
(Click to select)BorrowingsMerchandise purchasesCashRepaymentsInterest
(Click to select)RepaymentsInterestSalesCashAdvertising
(Click to select)Purchase of inventoryAccounts payableCashRentLand purchases
(Click to select)SalariesBorrowingsSalesInterestRepayments
(Click to select)InterestCashBorrowingsCommissionsSales
(Click to select)RepaymentsCashUtilitiesBorrowingsInterest
(Click to select)Accounts payableEquipment purchasesInterestRepaymentsSales
(Click to select)Dividends paidRepaymentsSalesBorrowingsAccounts payable
Total disbursements
Excess (deficiency) of receipts over     disbursements
Financing:
(Click to select)SalesMiscellaneousBorrowingsSales commissionsAccounts payable
(Click to select)SalesDividends paidRepaymentsSalaries and wagesCash
(Click to select)Purchase of inventoryAccounts payableInterestLand purchasesCash
Total financing
Cash balance, ending	$		$		$		$

Answer 1

Earrings Unlimited
Sales Budget
Months	April	May	June	Quarter
Budgeted unit sales	65900	100900	50900	217700
Selling Price Per unit	$              14.00	$                     14.00	$                  14.00	$                        14.00
Total sales	$    9,22,600.00	$         14,12,600.00	$        7,12,600.00	$            30,47,800.00
	Earrings Unlimited
	Schedule of Expected Cash collections
	Months Sales	April	May	June	Quarter
February sales=(26900*$14)*20% in April	$    3,76,600.00	$              75,320.00			$              75,320.00
March Sales=(40900*$14)*60% in April and (40900*$14)*20% in May	$    5,72,600.00	$           3,43,560.00	$        1,14,520.00		$           4,58,080.00
April sales=($922600*20%) in April,($922600*60%) in May and ($922600*20%) in June	$    9,22,600.00	$           1,84,520.00	$        5,53,560.00	$              1,84,520.00	$           9,22,600.00
May sales=($1412600)*20% in May and ($1412600*60% ) in June	$ 14,12,600.00		$        2,82,520.00	$              8,47,560.00	$         11,30,080.00
June Sales=($712600*20%) in June	$    7,12,600.00			$              1,42,520.00	$           1,42,520.00
Total Cash collections	$ 39,97,000.00	$           6,03,400.00	$        9,50,600.00	$            11,74,600.00	$         27,28,600.00
Earrings Unlimited
Inventory Purchase Budget
	April	May	June	Quarter
Budgeted Unit Sales=(A)	65900	100900	50900	217700
Add:Ending Inventory=(100900*30%) in April,(50900*30% in May),(30900*30%) in June=(B)	30270	15270	9270	9270
Total Needs=(C )=(A)+(B)	96170	116170	60170	226970
Less: BeginningInventory=(D)	19770	30270	15270	19770
Required Purchases=(E )=(C )-(D )	76400	85900	44900	207200
Cost of Purchase Per Unit=(F )	$                8.00	$                       8.00	$                    8.00	$                          8.00
Total Cost of Purchase=(E )*(F )	$    6,11,200.00	$           6,87,200.00	$        3,59,200.00	$            16,57,600.00
Cash Disbursement of Inventory Purchase
Months	April	May	June	Quarter
Accounts Payable	$    1,93,600.00			$              1,93,600.00
($611200*1/2) in April,($611200*1/2) in May	$    3,05,600.00	$           3,05,600.00		$              6,11,200.00
($687200*1/2) in May an ($687200*1/2) in June		$           3,43,600.00	$        3,43,600.00	$              6,87,200.00
($359200*1/2) in June			$        1,79,600.00	$              1,79,600.00
Total Cash Payments	$    4,99,200.00	$           6,49,200.00	$        5,23,200.00	$            16,71,600.00
	Earrings Unlimited Cash Budget
	For the three months ending June 30th
Months	April	May	June	Quarter
Cash Balance	$    1,50,000.00	$              30,396.00	$           30,592.00	$              1,50,000.00
Add: Collections from customer	$    6,03,400.00	$           9,50,600.00	$      11,74,600.00	$            27,28,600.00
Total Cash available	$    7,53,400.00	$           9,80,996.00	$      12,05,192.00	$            28,78,600.00
Less: Disbursement
Inventory Purchase	$    4,99,200.00	$           6,49,200.00	$        5,23,200.00	$            16,71,600.00
Advertisement	$    1,99,100.00	$           1,99,100.00	$        1,99,100.00	$              5,97,300.00
Rent	$       17,100.00	$              17,100.00	$           17,100.00	$                 51,300.00
Salaries	$    1,05,100.00	$           1,05,100.00	$        1,05,100.00	$              3,15,300.00
Commissions	$       36,904.00	$              56,504.00	$           28,504.00	$              1,21,912.00
Utilities	$         6,100.00	$                6,100.00	$             6,100.00	$                 18,300.00
Equipment Purchase		$              15,300.00	$           39,100.00	$                 54,400.00
Dividend Paid	$       10,500.00			$                 10,500.00
Total Disbursement	$    8,74,004.00	$         10,48,404.00	$        9,18,204.00	$            28,40,612.00
Excess/Deficiency of receipts over disbursement	$   -1,20,604.00	$            -67,408.00	$        2,86,988.00	$                 37,988.00
Financing:
Borrowings	$    1,51,000.00	$              98,000.00		$              2,49,000.00
Repayments			$      -2,49,000.00	$             -2,49,000.00
Interest=(151000*1%*3+$98000*1%*2)			$           -6,490.00	$                  -6,490.00
Total Financing	$    1,51,000.00	$              98,000.00	$      -2,55,490.00	$                  -6,490.00
Cash Balance ,ending	$       30,396.00	$              30,592.00	$           31,498.00	$                 31,498.00
Commission
	April	May	June
	($922600*4%)	($1412600*4%)	($712600*4%)