ABC Company is considering whether to open a new distribution center. The center would open January 1, 2015. To make the decision, the planning committee requires a master budget for the centers first quarter of operation (January, February, and March of 2015).

Required:

You are to construct the first quarter master budget based on the following expectations:

a. January sales are estimated to be $400,000 of which $100,000 will be cash sales and $300,000 will be on credit. The company expects sales to grow 10% per month for

the first few months of operation. Prepare a sales budget for the first quarter.

b. The company expects to collect 100% of accounts receivable in the month following

the sale. Prepare a schedule of expected cash receipts for the first quarter.

c. Use the information developed in requirements a and b to determine the amount of accounts receivable on the March 31 pro forma balance sheet and the amount of

sales on the first quarter pro forma income statement.

d. Cost of goods sold will be 60% of sales. Company policy is to budget an ending

inventory balance equal to 25% of the next months projected cost of goods sold.

Assume ABC Company expects April cost of goods sold to be $314,000. Prepare an

inventory purchases budget.

e. All inventory purchases are on account. The company pays 70% of accounts payable in the month of purchase. It pays the remaining 30% in the following month. Prepare a schedule of expected cash payments for inventory purchases.

f. Use the information developed in requirements d and e to determine the amount of cost of goods sold on the first quarter pro forma income statement and the amounts

of ending inventory and accounts payable on the March 31 pro forma balance sheet.

g. Budgeted monthly selling and administrative expenses are:

• Salary Expense (Fixed) = $24,000
• Sales Commissions = 5% of Sales
• Supplies Expense = 2% of Sales
• Utilities (Fixed) = $1,400
• Depreciation on Center Equipment (Fixed) = $750
• Rent (Fixed) = $3,600
• Miscellaneous (Fixed) = $900

• The capital expenditures budget shows that ABC Company must purchase $100,000 of equipment on January 1 to establish the new center. The equipment supplier allows a thirty-day trial period. ABC Company will pay for the equipment on January 31. The equipment is expected to have a 10-year useful life and a $10,000 salvage value. Prepare a selling and administrative expense budget.

h. Sales commissions and utilities are paid in the month after the month in which they

are incurred. All other expenses are paid in the month they are incurred. Prepare a schedule of cash payments for selling and administrative expenses.

i. Use the information developed in requirements g and h to determine the amount of sales commissions payable, utilities payable, and accumulated depreciation on the

March 31 pro forma balance sheet and the amount of selling and administrative expense on the first quarter pro forma income statement.

j. Using a line of credit, ABC Company borrows and repays principal in increments of $1,000 on the last day of the month as needed. It pays interest of 1 percent per month in cash on the last day of the month. Company policy is to maintain an ending cash balance of at least $12,000. Use this information and the schedules prepared in requirements b, e, and h to prepare a cash budget.

k. Use the information developed in requirement j to determine the cash flows from

operating, investing, and financing activities on the first quarter pro forma statement of cash flows, the interest expense on the first quarter pro forma income statement and the amount of the ending cash balance and the line of credit liability on the March 31 pro forma balance sheet.

l. Complete the first quarter pro forma income statement.

m. Complete the March 31 pro forma balance sheet.

n. Complete the first quarter pro forma statement of cash flows.

Work Papers a. b. c. Sales Budget, Schedule of Cash Receipts, Pro Forma Data Sales Budget Pro Forma PROJECTED SALES Mar Stmt. Data Jan Cash Sales Sales on Account (a) Total Budgeted Sales SCHEDULE OF CASH RECEIPTS Current Month's Cash Sales Previous Month's A/R Total Budgeted Cash Collections (a) Accounts receivable balance on March 31 pro forma balance sheet. (b) Sales revenue on first quarter pro forma income statement (sum of monthly sales). d. e. f. Inventory Purchases Budget, Schedule of Cash Payments for Inventory, Pro Forma Data Inventory Purchases Budget Pro Forma Feb Mar Stmt. Data Jan PROJECTED PURCHASES Budgeted Cost of Goods Sold Plus Desired Ending Inventory Total Inventory Needed Less Beginning Inventory Required Inventory Purchases SCHEDULE OF CASH PAYMENTS FOR INVENTORY PURCHASES Current Purchases Prior Month's Purchases Total Budgeted Inventory Payments a) Cost of goods sold on first quarter pro forma income statement (sum of monthly amounts) (b) Inventory balance on March 31 pro forma balance sheet. (c) Accounts payable balance on March 3 pro forma balance sheet