You have just been hired as a new management trainee by Flipflops Inc., a distri

Question

You have just been hired as a new management trainee by Flipflops Inc., a distributor of lowcost sandals 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 sandals, but all are sold for the same price— 10 per pair. Actual sales of sandals for the last three months and budgeted sales for the next six months follow (in pair of sandals): January(actual) 20,000 February(actual) 26,000 March (actual) 40,0000 April(budget) 65,000 May(budget) 100,000 June(budget) 50,000 July(budegt) 30,000 August(budegt) 28,000 September(budegt) 25,000 The concentration of sales before and during May is due to the beginning of warmer weather. Sufficient inventory should be on hand at the end of each month to supply 40.0% of the sandals sold in the following month. The Company pays suppliers $4.00 for a pair of sandals. Onehalf 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 sales are collected as follows: 15% of a month’s sales are collected in the month of sale 75% is collected in the following month 10% is collected in the second month following sale Monthly operating expenses for the company are given below: Variable: Sales Commissions 5% of sales Fixed: Advertising $195,000 Rent $20,000 Salaries $105,000 Utilities $7,000 Insurance $3,000 Depreciation $16,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $18,000 in new equipment during May and $35,000 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 below: ASSETS Cash $74,000 Accounts Receivable $366,000 Inventory $104,000 Prepaid Insurance $21,000 Property and Equip(net of depreciation) $950,000 Total Assets $1,515,000 Balance includes $26,000 in February sales and an additional $340,000 in March sales LIABILITIES & STOCKHOLDERS' EQUITY Accounts Payable $100,000 Dividends Payable $15,000 Common Stock $800,000 Retained Earnings $600,000 Total Liabilities & Stockholders' Equity $1,515,000 The company maintains a minimum cash balance of $50,000 The company has an agreement with a bank that allows the company to borrow in increments of at the beginning of each month. The interest rate on these loans is 1.50%. per month and for simplicity we will assume that interest is not compounded. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. 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 $ 50,000 in cash). Required: Prepare a master budget for the threemonth period ending June 30. Include the following detailed budgets: 1. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 2. A budgeted balance sheet as of June 30

Explanation / Answer

Sales and COGS budgte Apr May June Total Budgeted Sales          65,000        100,000          50,000        215,000 Sales ($)        650,000    1,000,000        500,000    2,150,000 COGS        260,000        400,000        200,000        860,000 Purchases Budget Apr May June Total 60% of current month sales        156,000        240,000        120,000        516,000 40% of next month sales        160,000          80,000          48,000        288,000 Total Purchases        316,000        320,000        168,000        804,000 Flipflops Inc Master Budget for the three month period ending June 30 Apr May June Total Cash Receipts        423,500        677,500        890,000    1,991,000 15% of current month sales          97,500        150,000          75,000        322,500 75% of prior month sales        300,000        487,500        750,000    1,537,500 10% of two month's prior sales          26,000          40,000          65,000        131,000 Vendor Payments        258,000        318,000        244,000        820,000 50% of current month purchase        158,000        160,000          84,000        402,000 50% of prior month purchase        100,000        158,000        160,000        418,000 Other Operating expenses Sales commission          32,500          50,000          25,000        107,500 Advertising        195,000        195,000        195,000        585,000 Rent          20,000          20,000          20,000          60,000 Salaries        105,000        105,000        105,000        315,000 Utilities             7,000             7,000             7,000          21,000 Total Other Operating expenses        359,500        377,000        352,000    1,088,500 Other payments Equipment purchases          18,000          35,000          53,000 Dividends          15,000          15,000 Interest             2,775 3360 Total Payments        632,500        715,775        634,360    1,982,635 Opening Cash balance          74,000          50,000          50,725          50,725 + Receipts        423,500        677,500        890,000    1,991,000 -Payments        632,500        715,775        634,360    1,982,635 Excess / (Deficiency)      (135,000)          11,725        306,365 Borrowing        185,000          39,000      (224,000)                    -   Ending Cash balance          50,000          50,725          82,365 Flipflops Inc Budgeted Income statement Apr May June Total Sales        650,000    1,000,000        500,000    2,150,000 COGS        260,000        400,000        200,000        860,000 Gross Profit        390,000        600,000        300,000    1,290,000 Other operating expenses Sales commission          32,500          50,000 25000        107,500 Advertising        195,000        195,000 195000        585,000 Rent          20,000          20,000 20000          60,000 Salaries        105,000        105,000 105000        315,000 Utilities             7,000             7,000 7000          21,000 Interest                    -               2,775             3,360             6,135 Insurance             3,000             3,000             3,000             9,000 Depreciation          16,000          16,000          16,000          48,000 Total Other Operating expenses        378,500        398,775        374,360    1,151,635 Dividends                    -                      -   15000          15,000 Net Income          11,500        201,225        (89,360)        123,365 Flipflops Inc Budgeted Income statement as of June 30 Assets Cash          82,365 Accounts Receivable (10% of May sales , 85% of June Sales)        525,000 Inventory          48,000 Prepaid Insurance (21000-9000)          12,000 Property and Equipment (Opening +Purchases - Depreciation = 950000+53000-48000)        955,000 Total Assets    1,622,365 Liabilitied and Equity Accounts Payable          84,000 Dividends payable          15,000 Bank loan Common stock        800,000 Retained earnings        600,000 Net Income for the quarter        123,365 Total Liabilities and equity    1,622,365

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