Question

You have been engaged as a consultant to design a master budget model and then to assist Helping Hand Corp. in making some management decisions based on that master budget. Helping Hand is a small, rapidly growing wholesaler of consumer electronic products. The company's main product lines are small kitchen appliances and power tools. The marketing manager has recently completed a sales forecast. She believes the company's sales will increase by 2 percent each month over the previous month's sales from December 2019 through March 2020. Then sales are expected to remain constant for several months. Helping Hand's projected balance sheet as of December 31, 2019 is as follows: Cash 140,000 Accounts receivable 202,851 Marketable securities 55,000 Inventory 35,894 Buildings and equipment (net of accumulated depreciation) 610,000 Total assets $ 1,043,745 $ 124,488 7,038 5,000 Accounts payable Sales commissions payable Bond interest payable Property taxes payable Bonds payable (3%; due in 2023) Common stock Retained earnings Total liabilities and stockholders' equity 500,000 250,000 157,219 1,043,745 $ The following information has been accumulated to assist with preparing the master budget for the first quarter of 2020: 1) Projected sales for November 2019 are $230,000. Credit sales are typically 85% of total sales. Helping Hand's credit experience indicates that 12% of credit sales are collected during the month of sale, 74% in the month following the sale, and 14% in the second month following the sale. Experience shows the remaining credit sales are uncollectible. 2) Helping Hand's cost of goods sold generally runs at 60% of sales. Inventory is purchased on account and 12% of each month's purchases are paid during the month of purchase. The remainder is paid during the following month. In order to have adequate stocks of inventory on hand, the company attempts to have inventory on hand at the end of each month equal to 25% of the next month's projected cost of goods sold. 3) The controller has estimated that Helping Hand's other monthly expenses will be as follows: Sales salaries 30,000 Advertising and promotion 6,000 Administrative salaries 11,000 Depreciation 8,000 Interest on bonds 1,250 Property taxes 4,000

Answer 1

1. Sales Budget. 2019 2020 Particulars November December January February March 1st Quarter Total Sales $ 2,30,000 $ 2,34,600 $ 2,39,292 $ 2,44,078 $ 2,48,959 $ 7,32,329 Cash Sales $ 34,500 $ 35,190 $ 35,894 $ 36,612 $ 37,344 $ 1,09,849 Sales on Account $ 1,95,500 $ 1,99,410 $ 2,03,398 $ 2,07,466 $ 2,11,615 $ 6,22,480 Expln : Sales are increased by 2% every month until march from december. So, sales are calculated as 102% of previous month. Cash Sales are 15% of total sales and credit sales are 85% of total sales. 2. Cash Receipts Budget. 2020 Particulars January February March 1st Quarter Cash Sales 35,894 $ 36,612 $ 37,344 $ 1,09,849 Cash Collections from Credit Sales made during Current Month $ 24,408 $ 24,896 $ 25,394 $ 74,698 Cash Collections from Credit Sales made during Preceding Month $ 1,47,563 $ 1,50,515 $ 1,53,525 $ 4,51,603 Cash Collections from Credit Sales made during 2nd Preceding Month $ 27,370 $ 27,917 $ 28,476 $ 83,763 Total Cash Receipts $ 2,35,235 $ 2,39,940 $ 2,44,738 $ 7,19,913 Expln : Cash Sales (12% of total sales) are received in month of Sale. 14% of Credit sales are received in the month of sale. 74% of Credit Sales is received in the next month of sale. For e.g. 74% of December Month's Credit sales are received in January Month. Remaining 14% of Credit Sales are received in 2nd next month after sale.

3. Purchases Budget. Particulars Budgeted Cost of goods sold Add : Desired Ending Inventory Total goods needed Less : Expected beginning inventory Purchases 2019 December 1,40,760 $ 35,894 2020 January February $ 1,43,575 $ 1,46,447 $ $ 36,612 $ 37,344 $ $ 1,80,187 $ 1,83,791 $ $ -35,894 $ -36,612 $ $ 1,44,293 $ 1,47,179 $ March 1st Quarter 1,49,376 $ 4,39,398 37,344 $ 37,344 1,86,720 $ 4,76,741 -37,344 $ -35,894 1,49,376 $ 4,40,848 $ -35,190 $ 1,41,464 4. Cash Disbursements Budget. Particulars 2020 February January March 1st Quarter Inventory Purchases : Cash Payments for the purchases made during the current month Cash Payments for the purchases made during the preceding month Total cash payments for the inventory purchases $ $ $ 17,315 $ 1,24,488 $ 1,41,803 $ 17,661 $ 1,26,978 $ 1,44,639 $ 17,925 $ 1,29,517 $ 1,47,443 $ 52,902 2,56,495 3,09,397 A A A Other Expenses : Sales Salaries Advertising and Promotion Administrative Salaries Interest on Bonds Property taxes Sales Commissions Total Cash Payments for Other Expenses 30,000 6,000 11,000 1,250 4,000 7,038 59,288 $ $ $ $ $ $ $ 30,000 6,000 11,000 1,250 4,000 7,179 59,429 $ $ $ $ $ $ $ 30,000 $ 6,000 $ 11,000 $ 1,250 $ 4,000 $ 7,322 $ 59,572 $ 90,000 18,000 33,000 3,750 12,000 21,539 1,78,289 A A A : Total Cash Disbursements $ 2,01,091 $ 2,04,068 $ 2,07,015 $ 4,87,686