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 sells many styles of earrings, but all are sold for the same price-$19 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) February (actual) March (actual) April (budget) May (budget) 23,000 29,000 43,000 68,000 103,000 June (budget) July (budget) August (budget) September (budget) 53,000 33,000 31,000 28,000 The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Suppliers are paid $5.50 for a pair of earrings. One-half 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. Only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $ 350,000 $ 33,000 $ 136,000 $ 14,500 $ 4,500 $ 29,000

Answer 1

Cash Budget
	April	May	June	Quarter
Beginning Cash	$             89,000	$             65,470	$                    353,940	$           89,000
Total Cash Collections	$           885,400	$       1,377,500	$                1,700,500	$     3,963,400
Total Cash Available	$           974,400	$       1,442,970	$                2,054,440	$     4,052,400
Deduct : Disbursements
For Merchandise purchase	$           340,500	$           453,750	$                    352,000	$     1,146,250
Advertising	$           350,000	$           350,000	$                    350,000	$     1,050,000
Rent	$             33,000	$             33,000	$                      33,000	$           99,000
Salaries	$           136,000	$           136,000	$                    136,000	$         408,000
Commission	51680	78280	40280	$         170,240
Utilities	$             14,500	$             14,500	$                      14,500	$           43,500
Equipment Purchases		$             23,500	$                      55,000	$           78,500
Dividend Paid	$             26,250			$           26,250
Total Disbursements	$           951,930	$       1,089,030	$                    980,780	$     3,021,740
Excess (Deficiency) of cash	$             22,470	$           353,940	$                1,073,660	$     1,030,660
Financing
Borrowing	$             43,000			$           43,000
Interest			$                     -43,000	$         -43,000
Repayment			$                       -1,290	$            -1,290
Total Financing	$             43,000	$                       -	$                     -44,290	$            -1,290
Ending Balance	$             65,470	$           353,940	$                1,029,370	$     1,029,370

Income Statement
Utilities Expense = $43500
Depreciation = $87000 i.e. 29000 x 3

Balance Sheet
Property Plant and Equipment = $1100000 + 78500 - 87000 = $1091500
Retained Earnings =  $1959770