You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2569778 • Letter: Y
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 a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.
The company desires a minimum ending cash balance each month of $10,000. The earrings are sold to retailers for $8 per pair. Recent and forecasted sales in units are as follows (in pairs of earrings):
January (actual)
20,000
June
60,000
February (actual)
24,000
July
40,000
March (actual)
28,000
August
36,000
April
35,000
September
32,000
May
45,000
Ending inventories are supposed to equal 90% of the next month’s sales in units. Suppliers are paid $5 for a pair of earrings.
Purchases from suppliers 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. The company has found 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 pair of earrings
Fixed:
Wages and salaries
$
22,000
Utilities
$
14,000
Insurance
$
1,200
Depreciation
$
1,500
Miscellaneous
$
3,000
All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. New equipment will be purchased during May for $25,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:
Assets
Cash
$
14,000
Accounts receivable ($48,000 February sales; $168,000
March sales)
216,000
Inventory (31,500 units)
157,500
Prepaid insurance
14,400
Fixed assets, net of depreciation
172,700
Total assets
$
574,600
Liabilities and Stockholders’ Equity
Accounts payable
$
85,750
Dividends payable
12,000
Capital stock
300,000
Retained earnings
176,850
Total liabilities and stockholders’ equity
$
574,600
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 $150,000. 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.
Required:
Create a sales budget for the quarter.
Create a schedule of expected cash collections for the quarter.
Create a merchandise purchases budget for the quarter.
Create a budget for cash disbursements for merchandise purchases for the quarter.
Create a cash budget for the quarter.
Create a budgeted income statement for the three-month period ending June 30. Use the contribution approach.
Create a budgeted balance sheet as of June 30.
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 a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.
The company desires a minimum ending cash balance each month of $10,000. The earrings are sold to retailers for $8 per pair. Recent and forecasted sales in units are as follows (in pairs of earrings):
Explanation / Answer
Solution:
Creating the Sales Budget for the Quarter:
Creating the schedule of expected cash collections for the Quarter:
Creating the Merchandise Purchases Budget for the Quarter:
Creating the budget for cash disbursements for merchandise purchases for the quarter:
Creating the Cash Budget for the Quarter:
Earnings Unlimited
Cash Budget
For the Three Months Ending June 30
Creating the Budgeted Income Statment for the Three Month Period Ending June 30 by Using the Contribution Approach:
Earnings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Creating the Budgeted Balance Sheet as of June 30:
Earnings Unlimited
Budgeted Balance Sheet
June 30
Sales Budget April May June Quarter Budgeted sales in units 35,000 45,000 60,000 140,000 Selling price per unit * $8 * $8 * $8 * $8 Total sales $280,000 $360,000 $480,000 $1,120,000Related Questions
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