Question

Solomon 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:

October sales are estimated to be $310,000, of which 45 percent will be cash and 55 percent will be credit. The company expects sales to increase at the rate of 20 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 70 percent of sales. The company desires to maintain a minimum ending inventory equal to 20 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $13,300. 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)	$	19,300
Sales commissions		4	% of Sales
Supplies expense		2	% of Sales
Utilities (fixed)	$	2,700
Depreciation on store fixtures (fixed)*	$	5,300
Rent (fixed)	$	6,100
Miscellaneous (fixed)	$	2,500

*The capital expenditures budget indicates that Solomon will spend $160,200 on October 1 for store fixtures, which are expected to have a $33,000 salvage value and a two-year (24-month) useful life.

Prepare a pro forma balance sheet at the end of the quarter. (Amounts to be deducted should be indicated by a minus sign.)

	SOLOMON COMPANY Pro Forma Balance Sheet December 31, 2019 Assets Cash Accounts receivable Inventory Store fixtures Less: Accumulated depreciation Book value of fixtures 0 Total assets $0 Liabilities Accounts payable Line of credit liability Utilities payable Sales commissions payable 0 Equity Retained earnings 0 Total liabilities and equity $0

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.

Prepare a pro forma statement of cash flows for the quarter. (Amounts to be deducted should be indicated by a minus sign.)

SOLOMON COMPANY Pro Forma Statement of Cash Flows For the Quarter Ended December 31, 2019 Cash flows from operating activities Cash payments for inventory Cash payments for selling and administrative expenses Cash payments for interest expense Cash receipts from customers Net cash flows from operating activities $0 Cash flows from investing activities Cash payment for store fixtures Cash flow from financing activities Net inflow from line of credit Net increase in cash Plus: Beginning cash balance Ending cash balance $0

Answer 1

SInce, there are multiple sub-parts to the question, I have answered the first four.

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Part 1)

The sales budget is prepared as below:

	Sales Budget
Sales	October	November	December	Total
Cash Sales	139,500 (310,000*45%)	167,400 [139,500*(1+20%)]	200,880 [167,400*(1+20%)]	507,780
Credit Sales	170,500 (310,000*55)	204,600 [170,500*(1+20%)]	245,520 [204,600*(1+20%)]	620,620
Total Budgeted Sales	$310,000	$372,000	$446,400	$1,128,400

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Part 2)

The schedule of cash receipts is given as follows:

	Schedule of Cash Receipts
	October	November	December	Total
Current Cash Sales	139,500	167,400	200,880	507,780
Collections from Accounts Receivable	0	170,500	204,600	375,100
Total Cash Collections	$139,500	$337,900	$405,480	$882,880

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Part 3)

The inventory purchases budget is prepared as follows:

	Inventory Purchases Budget
	October	November	December	Total
Budgeted Cost of Goods Sold	217,000 (310,000*70%)	260,400 (372,000*70%)	312,480 (446,400*70%)	789,880
Add Desired Ending Inventory	52,080 (260,400*20%)	62,496 (312,480*20%)	13,300	13,300
Less Beginning Inventory	0	52,080	62,496	0
Total Purchased Required	$269,080	$270,816	$263,284	$803,180

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Part 4)

The cash payments budget is given as below:

	Cash Payments Budget
	October	November	December	Total
Payment of Current Month of Accounts Payable	215,264 (269,080*80%)	216,653 (270,816*80%)	210,627 (263,284*80%)	642,544
Payment for Previous Month's Accounts Payable	0	53,816 (269,080*20%)	54,163 (270,816*20%)	107,979
Total Cash Payments	$215,264	$270,469	$264,790	$750,523