Acct 2220 Zeigler: Chp 7 Intro & Bee Gee Budget Case Study

Assignments: Read Chapter 7, review the PPT slides and walk-through the self-review problem (pg 272-274) for an overview of the Master Budgeting process. Next, complete E7-2A (pg 275) on paper (*add* a fourth column as total for the three months as required in Part b). This assignment will be collected in class. Last, read the Bee Gee Budget Case mgmt assumptions discussion below. Addn workpapers will be provided. We will begin the case together next class.

Comprehensive Master (Operating) Budget

Bee Gee Distributors, a wholesale company, is considering whether to open a new distribution center near Bowling Green, Ohio. The center would open January 1, 2020. The economic outlook is reasonable, but extensive advance planning is required if such a commitment is to be made. As a part of the planning process, The Board of Directors requires a Master (i.e. Operating) Budget for the centers first quarter of operations (i.e. January, February & March of 2020). In order to prepare any budget, management must make reasonable assumptions about expected sales, inventory levels and cash flows.

Required: Your help is needed to construct the entire first quarter Master Budget based upon the following two pages of management assumptions:

SALES BUDGET: What is the Profit Plan?

** It all starts with a sales forecast **

a. January sales are estimated to be $400,000 of which $100,000 (25%) will be cash and $300,000 will be on credit. Management expects the above sales pattern to continue with an overall grow rate of 10% per month. Prepare a sales budget.

b. The company expects to collect 100% of the accounts receivable in the month following the month of the sale. Prepare a schedule of expected cash receipts.

c. Use the information developed above 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.

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PURCHASES BUDGET: What are our total needs, less what do we have?

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. Prepare an inventory purchases budget.

Note: For March analysis needs, April cost of goods sold is expected to be $314,000.

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 above 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.

ADMINISTRATIVE & SALES EXPENSE BUDGET:

g. Budgeted monthly selling and administrative expenses are:

Salary Expense	$24,000
Sales Commissions	5% of Sales
Supplies Expense	2% of Sales
Utilities	$ 1,400
Depreciation on New Equipment (see note below*)	?
Rent	$ 3,600
Miscellaneous	$ 900

*The capital expenditures budget shows that Bee Gee must purchase $100,000 of equipment on January 1 to establish the new center. Since the equipment supplier allows a thirty-day trial period, assume Bee Gee will pay for the equipment in January (i.e. by 1/31). Using Straight-line depreciation, the equipment is expected to have a 10-year useful life and a $10,000 salvage value.

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 in which they are incurred. Prepare a schedule of cash payments for selling and administrative expenses.

i. Use the information developed above 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.

CASH BUDGET: How will we pay for (i.e. finance) this Profit Plan?

j. Using a line of credit, Bee Gee 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 (for three-months) Pro Forma Income Statement.

Note: See our class website for check-figure postings (and/or come to office hours).

m. Complete the March 31st Pro Forma Balance Sheet.

Note: See our class website for check-figure postings (and/or come to office hours).

n. Complete the first quarter (for three-months) Pro Forma Statement of Cash Flows.

Note: See our class website for check-figure postings (any/or come to office hours).