Joe Collagen is the president of a small retail company that sells a skin-smoothing lotion and that has been operating for several years. He keeps meticulous records of his actual operating activities, including monthly sales, purchases, and operating expenses, as well as the related cash receipts and payments. However, Joe has never prepared a master budget for the company. He comes to you for help and says, “My profits have been slowly de- creasing and | don’t know why. Also, sometimes when | least expect it, the company runs short of cash and | have to invest more into it. I’ve heard that preparing a master budget is a good thing to do, but | don’t know what is involved or where to begin.”

Required: Prepare a report to the president that explains

(a) what budgets and projected financial statements are included in a master budget, and

(b) clearly specifies how he would use the information from his previous actual operating activities to develop each of these budgets and the projected income statement.  lp85