EARRINGS UNLIMITED Minimum ending cash balance $50,000 Dividends declared each q

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EARRINGS UNLIMITED Minimum ending cash balance $50,000 Dividends declared each quarter $15,000 Selling price $10 Balance sheet at March 31: Recent and forecast sales: January (actual) 20,000 Assets February (actual) 26,000 Cash $74,000 March (actual) 40,000 Accounts receivable 346,000 April 65,000 Inventory 104,000 May 100,000 Prepaid insurance 21,000 June 50,000 Property and equipment (net) 950,000 July 30,000 Total assets $1,495,000 August 28,000 September 25,000 Liabilities and Stockholders' Equity Accounts payable $100,000 Desired ending inventories (percentage 40% Dividends payable 15,000    of next month's sales) Capital stock 800,000 Cost of earrings $4 Retained earnings 580,000 Total liabilities and equity $1,495,000 Purchases paid as follows: In month of purchase 50% Annual interest 12% In following month 50% You have just been hired as a new management trainee by Earrings Collection on sales: Unlimited, a distributor of earrings to various retail outlets located in Sales collected current month 20% shopping malls across the country. In the past, the company has Sales collected following month 70% done very little in the way of budgeting and at certain times of the Sales collected 2nd month following 10% year has experienced a shortage of cash. Monthly expenses are: Variable: Since you are well trained in budgeting, you have decided to prepare Sales commissions 4% comprehensive budgets for the upcoming second quarter in order to Fixed: show management the benefits that can be gained from an integrated Advertising $200,000 budgeting program. To this end, you have worked with accounting Rent $18,000 and other areas to gather the information assembled on this page. Salaries $106,000 Utilities $7,000 The company sells many styles of earrings, but all are sold for the Insurance $3,000 same price--$10 per pair. Actual sales of earrings for the last three Depreciation $14,000 months and budgeted sales for the next six months are listed on this page to the right.(in pairs of earrings) Equipment purchased in May $16,000 The concentration of sales before and during May is due to Mother's Equipment purchased in June $40,000 Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Supplies are paid $4 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 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 expenses are listed above for both fixed and variable. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment in May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 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 above in the form of a balance sheet. The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayment are made at the of a month. The annual interest rate is 12%. Interest is computed and paid at the end of each quarter on all loans outstanding during the quarter. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: 1. a. A sales budget, by month and in total. . b. A schedule of expected cash collections from sales, by month and in total. . c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.      d. A schedule of expected cash disbursement for merchandise purchases, by month and in total. 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 $50,000. 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet. EARRINGS UNLIMITED Minimum ending cash balance $50,000 Dividends declared each quarter $15,000 Selling price $10 Balance sheet at March 31: Recent and forecast sales: January (actual) 20,000 Assets February (actual) 26,000 Cash $74,000 March (actual) 40,000 Accounts receivable 346,000 April 65,000 Inventory 104,000 May 100,000 Prepaid insurance 21,000 June 50,000 Property and equipment (net) 950,000 July 30,000 Total assets $1,495,000 August 28,000 September 25,000 Liabilities and Stockholders' Equity Accounts payable $100,000 Desired ending inventories (percentage 40% Dividends payable 15,000    of next month's sales) Capital stock 800,000 Cost of earrings $4 Retained earnings 580,000 Total liabilities and equity $1,495,000 Purchases paid as follows: In month of purchase 50% Annual interest 12% In following month 50% You have just been hired as a new management trainee by Earrings Collection on sales: Unlimited, a distributor of earrings to various retail outlets located in Sales collected current month 20% shopping malls across the country. In the past, the company has Sales collected following month 70% done very little in the way of budgeting and at certain times of the Sales collected 2nd month following 10% year has experienced a shortage of cash. Monthly expenses are: Variable: Since you are well trained in budgeting, you have decided to prepare Sales commissions 4% comprehensive budgets for the upcoming second quarter in order to Fixed: show management the benefits that can be gained from an integrated Advertising $200,000 budgeting program. To this end, you have worked with accounting Rent $18,000 and other areas to gather the information assembled on this page. Salaries $106,000 Utilities $7,000 The company sells many styles of earrings, but all are sold for the Insurance $3,000 same price--$10 per pair. Actual sales of earrings for the last three Depreciation $14,000 months and budgeted sales for the next six months are listed on this page to the right.(in pairs of earrings) Equipment purchased in May $16,000 The concentration of sales before and during May is due to Mother's Equipment purchased in June $40,000 Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Supplies are paid $4 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 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 expenses are listed above for both fixed and variable. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment in May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 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 above in the form of a balance sheet. The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayment are made at the of a month. The annual interest rate is 12%. Interest is computed and paid at the end of each quarter on all loans outstanding during the quarter. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: 1. a. A sales budget, by month and in total. . b. A schedule of expected cash collections from sales, by month and in total. . c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.      d. A schedule of expected cash disbursement for merchandise purchases, by month and in total. 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 $50,000. 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet.

Explanation / Answer

SALES BUDGET:
April May June Quarter
Budgeted unit sales 65,000 100,000 50,000 215,000
Selling price per unit 10 10 10 10
Total Sales 650,000 1,000,000 500,000 2,150,000


SCHEDULE OF EXPECTED CASH COLLECTIONS:
April May June Quarter
February sales 26,000 26,000
March sales 280,000 40,000 320,000
April sales 130,000 455,000 65,000 650,000
May sales 200,000 700,000 900,000
June sales 100,000 100,000
Total Cash Collections 436,000 695,000 865,000 1,996,000


MERCHANDISE PURCHASES BUDGET:
April May June Quarter
Budgeted unit sales 65,000 100,000 50,000 215,000
Add desired ending inventory 40,000 20,000 12,000 12,000
Total needs 105,000 120,000 62,000 227,000
Less beginning inventory 26,000 40,000 20,000 26,000
Required purchases 79,000 80,000 42,000 201,000
Cost of purchases @ $4 per unit $316,000.00 $320,000.00 $168,000.00 $804,000.00


BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES:
April May June Quarter
Accounts payable $100,000.00 $100,000.00
April purchases $158,000.00 $158,000.00 $316,000.00
May purchases $160,000.00 $160,000.00 $320,000.00
June purchases $84,000.00 $84,000.00
Total cash payments $258,000.00 $318,000.00 $244,000.00 $416,000.00


EARRINGS UNLIMITED
CASH BUDGET
FOR THE THREE MONTHS ENDING JUNE 30
April May June Quarter
Cash balance $74,000.00 $50,000.00 $50,000.00 $174,000.00
Add collections from customers $436,000.00 $695,000.00 $865,000.00 $595,600.00
Total cash available $510,000.00 $745,000.00 $915,000.00 $2,170,000.00

Less Disbursements
Merchandise purchases $258,000.00 $318,000.00 $244,000.00 $416,000.00
Advertising $200,000.00 $200,000.00 $200,000.00 $200,000.00
Rent $18,000.00 $18,000.00 $18,000.00 $18,000.00
Salaries $106,000.00 $106,000.00 $106,000.00 $106,000.00
Commissions $26,000.00 $40,000.00 $20,000.00 $86,000.00
Utilities $7,000.00 $7,000.00 $7,000.00 $21,000.00
Equipment purchases $16,000.00 $40,000.00 $56,000.00
Dividends paid $15,000.00 $15,000.00
Total Disbursements $630,000.00 $705,000.00 $635,000.00 $918,000.00

Excess (deficiency) of receipts over disbursements
(120,000) 40,000 280,000 1,252,000
Financing:
Borrowings 170,000 10,000 180,000
Repayments 180,000 (180,000)
Interest 5,300 (5,300)
Total financing 170,000 10,000 185,300 (5,300)

Cash balance, ending 50,000 50,000 94,700 94,700


EARRINGS UNLIMITED
BUDGETED INCOME STATEMENT
FOR THE THREE MONTHS ENDED JUNE 30

Sales 2,150,000
Variable expenses:
Cost of goods sold 860,000
Commissions 86,000 946,000
Contribution Margin 1,204,000
Fixed expenses:
Advertising 600,000
Rent 54,000
Salaries 318,000
Utilities 21,000
Insurance 9,000
Depreciation 42,000 1,044,000
Net operating income 160,000
Interest expense (5,300)
Net income 154,700


EARRINGS UNLIMITED
BUDGETED BALANCE SHEET
JUNE 30

Assets:

Cash 94,700
Accounts receivable (see below) 500,000
Inventory 48,000
Prepaid insurance 12,000
Property and equipment, net 964,000
Total assets 1,618,700


Liabilities and Stockholders' Equity

Accounts payable, purchases 84,000
Dividends payable 15,000
Capital stock 800,000
Retained earnings (see below) 719,700 -
Total liabilities and stockholders' equity 1,618,700


Accounts receivable at June 30:
May sales x ?% 100,000
June sales x ?% 400,000
Total 500,000


Retained earnings at June 30:
Balance, March 31 580,000
Add net income 154,700
Total 734,700
Less dividends declared 15,000
Balance, June 30 719,700

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