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Problem 7-23B Preparing a master budget for a retail company with no beginning account balances

Inwood Gifts Corporation begins business today, December 31, 2017. Rebecca Ortiz, the president, is trying to prepare the companys master budget for the first three months (January, February, and March) of 2018. Since you are her good friend and an accounting student, Ms. Ortiz asks you to prepare the budget based on the following specifications:

Required

January sales are estimated to be $500,000, of which 30 percent will be cash and 70 percent will be credit. The company expects sales to increase at the rate of 10 percent per month. Prepare a sales budget.

The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts.

The cost of goods sold is 50 percent of sales. The company desires to maintain a minimum ending inventory equal to 20 percent of the next months cost of goods sold. The ending inventory of March is expected to be $66,000. Assume that all purchases are made on account. Prepare an inventory purchases budget.

The company pays 60 percent of accounts payable in the month of purchase and the remaining 40 percent in the following month. Prepare a cash payments budget for inventory purchases.

Budgeted selling and administrative expenses per month follow:

Salary expense (fixed)	$50,000
Sales commissions	8% of sales
Supplies expense	4% of sales
Utilities (fixed)	$3,600
Depreciation on store fixtures (fixed)*	$10,000
Rent (fixed)	$?14,400
Miscellaneous (fixed)	$4,000
*The capital expenditures budget indicates that Inwood will spend $700,000 on January 1 for store fixtures. The fixtures are expected to have a $100,000 salvage value and a five-year (60-month) useful life.

Use this information to prepare a selling and administrative expenses budget.

Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses.

The company borrows funds, in increments of $1,000, and repays them in any amount available on the last day of the month. It pays interest of 1.5 percent per month in cash on the last day of the month. For safety, the company desires to maintain a $100,000 cash cushion. The company pays its vendors on the last day of the month. Prepare a cash budget.

Prepare a pro forma income statement for the quarter.

Prepare a pro forma balance sheet at the end of the quarter.

Prepare a pro forma statement of cash flows for the quarter.

g. Cash Budget January February 100,100 515,000 615,100 March Pro Forma Data 100,000 566,500 1,231,500 (m) 666,500 150,000 150,000 183,000 88,400 700,000 290,300 134,000 Beginning cash balance Add cash receipts Cash available Less payments: For inventory purchases For S & A expenses Purchase of store fixtures Interest expense Total budgeted payments Cash surplus (shortage) Financing activity: Borrowing (repayment) Ending cash balance 297,000 140,200 770,300 (n) 362,600 (0) 700,000 (P) (a) (1) (s) (m) Cash receipts operating activity total for the quarter (n) Cash payments for inventory operating activity total for the quarter (o) Cash payments for S & A expense operating activity total for the quarter Lp Store tixtures cost at March 31st: also cash payments for fixtures (7) Interest expense total for the quarter, also cash payments for interest expense operating activity total for the quarter (r) Line of credit liability at March 31st; also net borrowings for financing activity total for the quarter (s) Cash balance at March 31st Inwood Gifts Corporation Sheet1 Sheet2 Sheet dy