Question
Background: As the owner of a local CPA firm, you have been hired to help a new small business, Thunderduck Construction. The company has been
Background:
As the owner of a local CPA firm, you have been hired to help a new small business,
Thunderduck Construction. The company has been in business for one year and reports
financial information on a quarterly basis. The company uses the accrual-basis method of
accounting and follows US GAAP.
Budget Assignment - Part 1 (75 points)
- Create a quarterly budgeted income statement for Year 2 based on prior year data and
discussions with management, using the excel template provided.
- Prepare a quarterly cash budget (including a schedule of cash receipts and disbursements)
for Year 2. Use the separate tab created in the excel template provided.
Use the following assumptions for the budgeted income statement in Year 2 based on historical
results and discussions with management:
New construction and Remodel revenue
| - Calculate the average for Year 1. This will be the amount of revenue for Q1 and Q4 of Year 2. - Q2 and Q3 of Year 2 will be 15% higher than the Year 1 average due to high demand for homes in the spring. |
Cost of goods sold
| - 61% of total revenue in Q1 and Q3 in Year 2. - 59% of total revenue in Q2 and Q4 in Year 2. |
Salaries expense
| - Mixed expense with a fixed portion of $4,600 per quarter for Q1, Q2, Q3. The variable portion is $5 per project. - Fixed portion will be 15% higher in Q4 due to year-end bonuses. Variable will be the same as $5 per project. - 22 projects expected in Q1 and Q2 in Year 2. - 32 projects expected in Q3 and Q4 in Year 2. |
Marketing expense | - Equal to the same quarter in Year 1. |
Legal expense | - Calculate the average for Year 1. This will be the amount for every quarter in Year 2. |
Business development expense | - $3,100 in Q1 and Q2 of Year 2. - Due to an increase in projects, increase to $4,000 in Q3 and Q4 of Year 2. |
Depreciation expense
| - $675 in Q1 and Q2 of Year 2. - Will increase to $825 in Q3 and Q4 of Year 2 due to new equipment. |
Office supplies expense
| - Calculate the average for Year 1. This will be the amount for Q1 and Q4 of Year 2. - Q2 and Q3 of Year 2 will be 25% higher with expected increased business. |
Miscellaneous expense | - 4% of COGS each quarter of Year 2. |
Use the following assumptions for the cash budget based on historical results and
discussions with management:
New construction and Remodel revenue
| All sales on made on account and have the following collection pattern: - 55% will be collected in the quarter the sale is made - 35% will be collected in the quarter following the sale - 5% will be collected two quarters following the sale |
Cost of goods sold
| All purchases of cost of goods sold are on account and have the following payment pattern: - 50% of purchases are paid for in the quarter of purchase - The remainder are paid in the following quarter |
Selling and administrative expenses | - Cash is paid for all expenses in the quarter they are incurred except for depreciation expense (which is a non-cash expense). |
Purchase of equipment | - Equipment costing $13,400 was purchased at the beginning of Q3 of Year 2. |
Borrow from Bank
| - The company signed a promissory note to borrow $14,600 at the beginning of Q2 of Year 2. - Interest of $180 is due at the end of each quarter, beginning in Q3 of Year 2. - No loans will be repaid in Year 2. |
Beginning cash balance | - Started Year 2 with a $10,800 cash balance. |
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