Case 9-29 Master Budget with Supporting Schedules [LO9-2, LO9-4, LO9-8, LO9-9, L

Question

Case 9-29 Master Budget with Supporting Schedules [LO9-2, LO9-4, LO9-8, LO9-9, LO9-10] You have just been hired as a management trainee by Cravat Sales Company, a nationwide distributor of a designer’s silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favorable impression on the president and have assembled the information below. The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows: January (actual) 28,000 June 61,000 February (actual) 33,000 July 49,000 March (actual) 33,000 August 45,000 April 39,000 September 41,000 May 47,000 The large buildup in sales before and during June is due to Father’s Day. Ending inventories are supposed to equal 90% of the next month’s sales in units. The ties cost the company $5 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 25% of a month’s sales are collected by month-end. An additional 50% is collected in the following month, and the remaining 25% is collected in the second month following sale. Bad debts have been negligible. The company’s monthly selling and administrative expenses are given below: Variable: Sales commissions $ 1 per tie Fixed: Wages and salaries $ 24,100 Utilities $ 17,100 Insurance $ 1,400 Depreciation $ 1,500 Miscellaneous $ 3,500 All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for $28,000 cash. The company declares dividends of $9,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below: Assets Cash $ 17,000 Accounts receivable ($66,000 February sales; $198,000 March sales) 264,000 Inventory (35,100 units) 175,500 Prepaid insurance 16,800 Fixed assets, net of depreciation 114,200 Total assets $ 587,500 Liabilities and Stockholders’ Equity Accounts payable $ 96,000 Dividends payable 9,000 Capital stock 300,000 Retained earnings 182,500 Total liabilities and stockholders’ equity $ 587,500 The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $100,000. 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 $10,000 in cash.

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

A budgeted balance sheet as of June 30.

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

A budgeted balance sheet as of June 30.

Explanation / Answer

Income Statement as on 3o June 2016 April May June Total Sales 312000 376000 488000 1176000 Less: variable Cost Cost of Good Sold 195000 235000 305000 735000 Sales Commissions 39000 47000 61000 147000 Contribution 78000 94000 122000 294000 Fixed Expenses Wages & Salaries 24100 24100 24100 72300 Utilities 17100 17100 17100 51300 Miscelleneous expenses 3500 3500 3500 10500 Insurance 1400 1400 1400 4200 Depreciation 1500 1500 1500 4500 Interest On Short Term Loan 220 900 900 2020 Net Operating Income 30180 45500 73500 149180 Statement of Retained earnings Opening balance 182500 Add: Net Income for the year 149180 Closing balance 331680 BalANCE Sheet as on 30 June Amount $ Assets Current assets Cash 10380 Accounts Receivable 460000 Inventory (44100*5) 220500 Prepaid Insurance (16800-1400*3) 12600 Total Current assets 703480 Fixed Assets Plant & Equipment (114200+28000) 142200 Less: Accumulated Depreciation -4500 Total Fixed Assets 137700 Total Assets 841180 Liabilities Current Liabilities Accounts payable 125500 Short Term Loan payable 84000 Total Current Liabilities 209500 Stockholder equity Common Stock 300000 Retained earnings 331680 Total Stockholder equity 631680 TotalLiabilities & Equity 841180 Ans 1 Budgeted Cash Receipt April May June Total Sales in units A 39000 47000 61000.0 147000 Sale Price 8 8 8 8 Sales in value 312000 376000 488000 1176000 25% in same month 78000 94000 122000 294000 March April 50% in next month 132000 156000 188000 476000 198000 132000 25% in second month 66000 66000 78000 210000 Total A 276000 316000 388000 980000 Accounts Receivable May 376000*.25+June 488000*.75= 460000 Note 2 Cash Disbursement April May June Total July Finished Goods Sales S 39000 47000 61000 147000 49000 Closing Inventory 90% of next month sales S*.9 42300 54900 44100 900 Total Finised Googd 81300 101900 105100 147900 Less: Beginning Inventory 35100 42300 54900 800 Units to be produced 46200 59600 50200 156000 Purchase Price 5 5 5 5 Total Purchase price A 231000 298000 251000 780000 COGS= Units sold*5 195000 235000 305000 735000 Cash Disbursement 50% same month A 115500 149000 125500 390000 50% in next month 96000 115500 149000 360500 Total B 211500 264500 274500 750500 Accounts payable as on 30 June 251000*.5 125500 Cash Expenses Cash payment of purchases 211500 264500 274500 750500 Sales Commissions @ $1 *S 39000 47000 61000 147000 Wages & Salaries 24100 24100 24100 72300 Utilities 17100 17100 17100 51300 Miscelleneous expenses 3500 3500 3500 10500 Cash Expenses 295200 356200 380200 1031600 Divedend Paid 9000 9000 Land purchased 28000 28000 Total cash payment 304200 384200 380200 1068600 April May J June Total Beginning Cash balance 17000 $10,800 $10,600 17000 Ans 1 Budgeted Cash Receipt 276000 316000 388000 980000 Less: Total cash payment 304200 384200 380200 1068600 Cash Balance before minimum cash balance ($11,200) -57400 18400 -71600 Minimum Cash balance 10000 10000 10000 10000 Cash balnce Available ($21,200) ($67,400) $8,400 ($81,600) Borrowed/Repaid 22000 68000 -6000 $84,000 Interest Repaid 3% on $46000 -2020 ($2,020) 22000*3%+68000*2% Cash Balance $800 $600 $380 $380 Closing Cash Balance (Minimum Balance+cash balance) $10,800 $10,600 $10,380 $10,380 See the cash disbursement and cash payment schedule`

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