Question

Sweet Company, a specialty chocolate store, prepares a master budget on a quarterly basis. The company has assembled the following data to assist in preparing its master budget for the first quarter:

a. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

	Debits	Credits
Cash	$ 50,000
Accounts Receivable	162,500
Inventory	58,000
Buildings and Equipment (net)	370,000
Accounts Payable		$ 65,000
Capital Stock		412,500
Retained Earnings		163,000
	$640,500	$640,500

b. Actual sales for November and December, along with budgeted sales for the next four months, are as follows:

November (actual)	$250,000
December (actual)	$300,000
January	$300,000
February	$650,000
March	$350,000
April	$200,000

c. Sales are 50% for cash sales and 50% for credit sales. Credit sales are collected in the two months following the sale: 90% the month after the sale, 10% two months after the sale. The accounts receivable at December 31 are a result of November and December credit sales.

d. The company’s gross margin is 45% of sales. (In other words, cost of goods sold is 55% of sales.)

e. Monthly salary and wage expenses are budgeted as follows: salaries and wages, $27,000 per month for the first two months, $26,000 in March as Sweet cuts the hours of its sales force to reflect declining sales.

f. Other monthly expenses are as follows: advertising $80,000 per month; shipping cost is 5% of total monthly sales revenues, and other expenses are 3% of sales revenues. Depreciation, including depreciation on new assets acquired during the quarter, will be $40,000 for the quarter.

g. Each month’s ending inventory should equal 10% of the following month’s cost of goods sold.

h. One-half of a month’s inventory purchases are paid for in the month of purchase; the other half is paid in the following month.

i. During January, the company will purchase a new copy machine for $2,000 cash. During March, other equipment will be purchased for cash at a cost of $79,500.

j. During January, the company will declare and pay $38,000 in cash dividends.

k. The company must maintain a minimum cash balance of $40,000. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month. Borrowings and repayments of principal must be in multiples of $1,000. Interest is paid only at the time of payment of principal. The annual interest rate is 6%. (Figure interest on whole months, e.g., 2/12, 3/12.)

l. The company does not pay any income taxes.

Required:

Using the data above, complete the following statements and schedules for the first quarter:

5. Cash budget:

	January	February	March	Quarter
Cash balance, beginning	$50,000
Add cash collections	297,500
Total cash available	347,500
Less cash disbursements:
Purchases of inventory	136,375
Selling and administrative expenses	131,000
Purchases of equipment
Cash dividends
Total cash disbursements
Excess (deficiency) of cash
Financing:
Borrowings
Repayments
Interest
Total Financing
Cash Balance, ending

Answer 1

	Note:1	Schedule of cash collections
						January	February	March	Quarter
	Budgeted sales					300000	650000	350000	1300000
	Cash sales @ 50%				a	150000	325000	175000	650000
	Credit sales @ 50%					150000	325000	175000	650000
	90% Collected in the month following sale				b	135000	135000	292500	562500
						(300000*50%*90%)	(150000*90%)	(325000*90%)
	10% collected in two months after sale				c	12500	15000	15000	42500
						(250000*50%*10%)	(300000*50%*10%)	(150000*10%)
	Total collections				a+b+c	297500	475000	482500	1255000
	Note:2
	Gross margin=45% of sales
	Cost of goods sold=100%-45%=55% of sales
		Budgeted ending inventories
					Jan	Feb	Mar	April
	Sales in $				300000	650000	350000	200000
	Cost of goods sold		(55% of sales)		165000	357500	192500	110000
	Ending inventory
	(10% of following month's cost of goods sold)				35750	19250	11000
		Merchandise purchase budget
					Jan	Feb	Mar	Quarter
	Cost of goods sold				165000	357500	192500	715000
	Add: Desired ending inventory				35750	19250	11000	66000
	Total needs				200750	376750	203500	781000
	Less; beginning inventory				58000	35750	19250	113000
	(Ending inventory of last month)				(Refer balance sheet)
	Required purchases				142750	341000	184250	668000
	Note:3	Schedule of expected cash disbursement
					Jan	Feb	Mar	Quarter
	December purchases (Accounts payable)				65000			65000
	January purchases			(142750*1/2)	71375	71375		142750
	February purchases			(341000*1/2)		170500	170500	341000
	March purchases			(184250*1/2)			92125	92125
	Total				136375	241875	262625	640875
	Note:4	Selling and administrative expenses
					Jan	Feb	Mar	Quarter
	Salaries and wages				27000	27000	26000	80000
	Advertising				80000	80000	80000	240000
	Shipping			(5% of sales)	15000	32500	17500	65000
					(300000*5%)	(650000*5%)	(350000*5%)
	Other expenses			(3% of sales)	9000	19500	10500	39000
					(300000*3%)	(650000*3%)	(350000*3%)
	Total				131000	159000	134000	424000
5		Cash budget
						Jan	Feb	Mar	Quarter
	Cash balance,beginning					50000	40125	114250	38075
	Add: cash collections				(Note:1)	297500	475000	482500	1255000
	Total cash available				a	347500	515125	596750	1459375
	Less: Cash disbursements
	Purchases of inventory				(Note:3)	136375	241875	262625	640875
	Selling and administrative expenses				(Note:4)	131000	159000	134000	424000
	Purchase of new copy machine					2000			2000
	Purchase of equipment							79500	79500
	Cash dividends					38000			38000
	Total cash disbursements				b	307375	400875	476125	1184375
	Excess (deficiency) of cash				c=a-b	40125	114250	120625	275000
	Financing:
	Borrowings		(To make $ 40000 balance)						0
	Repayment							0	0
	Interest							0	0
	(81000*1%*3)
	Total financing				d	0	0	0	0
	Cash balance,ending				e=c+d	40125	114250	120625	120625