Assets $ 14,000 Accounts receivable ($48,000 February sales, CRAVET SALES COMPANY $168,000 March sales). . ... 216,000 You have just been hired as a management trainee by Cravat Sales Company, a nationwide Inventory (31,500 units) .... 157,500 distributor of a designer's silk ties. The company has an exclusive franchise on the distribution of Prepaid insurance. . . . .. . . . . . 14,400 the ties, and sales have grown so rapidly over the last few years that it has become necessary to Fixed assets, net of depreciation . . . . . 172,700 add new members to the management team. You have been given responsibility for all planning . . . $574,600 and budgeting. Your first assignment is to prepare a master budget for the next three months, Total assets . . .... starting April 1. You are anxious to make a favourable impression on the president and have assembled the Information below. Liabilities and Shareholders' Equity The company desires a minimum ending cash balance each month of $10,000. The ties are sold Accounts payable . ... 6 85,750 to retailers for $8 each. Recent and forecasted sales in units are as follows: Dividends payable .. 12,000 January (actual) .. .. . . .. 20,000 60,000 Common shares. 300,000 June. . February (actual) . . 24,060 . .. . 176,850 July . .. 40,000 Retained earnings. March (actual) . .. . 28,000 August 36,000 Total liabilities and shareholders' equity....... $574,600 April. ... 35,000 September . .... 32,000 May . . . . 45,000 The company has an agreement with a bank that allows it to borrow at the beginning of each The large buildup in sales before and during June is due to Father's Day. Ending inventories are month, up to a total loan balance of $140,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. At the end of the supposed to equal 90% of the next month's sales in units. The ties cost the company $5 each. quarter, the company would pay the bank all of the accumulated interest on the loan and Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the as much of the loan as possible, while still retaining at least $10,000 in cash. following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 25% of a month's sales is collected by month-end. An additional 50% is collected in the following month, and the remaining 25% is collected in the Example: Financing Section second month following sale. Bad debts have been negligible. Excess (Deficiency) of cash $ _(20,000) $ (30,000) $ 25,000 The company's monthly selling and administrative expenses are given below: Financing Variable: Borrowings S 30,000 $ 40,000 S Sales commissions. .... $1 per tie Repayments 0 (13,300) Fixed: Interest 0 0 ($1,700) Wages and salaries. $22,000 Total Financing 30,000 $15,000) Utilities . .. . . .. $14,000 $40,000 Insurance ... . .. $1,200 Cash Balance, Ending 10,000 $ 10,000 $ 10,000 Depreciation... . $1,500 Miscellaneous. . . $3,000 *30,000 x 3% + 40,000 x 2%= $1,700 All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for $25,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 is given below
