Case 2. Annual Budget and Budgeted Financial Statements

Facts

Nomad Vineyards Inc. (Nomad) is a wholesale distributor of imported wine that commenced operations in 20Y1. Ethan is the president of Nomad and has just hired you as a consultant to help him prepare monthly budgets for the upcoming year, 20Y2. For simplicity, prepare monthly budgets for only the first half of the year, January 1 through June 30, 20Y2.

Ethan has made some sales forecasts for 20Y2. He expects monthly sales to start at $400,000 in January and then grow $20,000 per month during the first half of the year, as follows:

Sales revenue, 20Y1			Budgeted sales revenue, 20Y2
October	$330,000		January	$400,000		April	$460,000
November	$355,000		February	$420,000		May	$480,000
December	$380,000		March	$440,000		June	$500,000
						July	$520,000

All inventory sales are made on account. Nomad collects 20% of its receivables in the month of the sale and 80% in the following month. Uncollectible accounts were negligible in 20Y1 and no bad debts are expected in 20Y2. Nomads only cash receipts are from inventory sales.

All merchandise inventory purchases are made on account. Nomad pays 30% of its payables in the month of the purchase and 70% in the following month. Nomads gross profit percentage is 40% and its cost of goods sold percentage is 60%. Nomad maintains an ending inventory balance (safety stock) equal to 50% of the cost of goods sold in the following month. Inventory purchases in December 20Y1 were $234,000.

Nomads monthly selling and administrative (S&A) expenses include variable costs equal to 5% of sales revenue and fixed costs of $70,000. The variable S&A expenses are sales commissions, whereas the fixed S&A expenses include rent, advertising, salaries, insurance, and depreciation. All S&A expenses are paid in cash in the month the expense is incurred, except for monthly depreciation expense of $10,000 and monthly insurance expense of $3,000. Nomad paid its annual insurance premium for 20Y2 of $36,000 on December 31, 20Y1.

Ethan has established a capital expenditure budget for 20Y1. The plan is to acquire $75,000 of new property, plant and equipment (PP&E) at the start of each quarter, including January 20Y2 and April 20Y2. Nomad pays dividends semi-annually in January and July. In December 20Y1, Nomad declared a $50,000 dividend which is payable in January 20Y2. Nomads accountant estimates that its income tax liability for 20Y2 will be $260,000 (tax rate of roughly 25%). Consequently, Nomad will make four quarterly estimated income tax payments of $65,000 each on April 15, June 15, September 15 and December 15 of 20Y2.

Nomads balance sheet on December 31, 20Y1 is as follows:

Assets
Cash	$ 124,000
Accounts receivable [a]	304,000
Inventory	120,000
Prepaid insurance	36,000
PP&E, net of accumulated depreciation	796,000
Total assets	$1,380,000

Liabilities and Stockholders Equity
Accounts payable [b]	$ 163,800
Dividends payable	50,000
Common stock	1,000,000
Retained earnings	166,200
Total liabilities & stockholders equity	$1,380,000

[a] Nomad will collect the entire balance in January 20Y2

[b] Nomad will pay off the entire balance in January 20Y2

3. S&A expenses budget and expected cash payments for S&A expenses, 20Y2
	January	February	March	April	May	June	6 months
Accrual-basis S&A expenses
Variable S&A expenses	20,000
Fixed S&A expenses	70,000
Total S&A expenses	90,000
Cash payments for S&A expenses
- Depreciation expense	(10,000)
- Prepaid insurance expense	(3,000)
Total cash payments	77,000

4. Cash budget, 20Y2
	January	February	March	April	May	June	6 months
Beginning cash balance	124,000
+ Cash receipts from sales	384,000
Cash payments for:
Inventory purchases	(237,600)
S&A expenses	(77,000)
Capital expenditures	(75,000)
Dividends	(50,000)
Income taxes
Ending cash balance	68,400

Check figures:

Total budgeted sales revenue is $2,700,000

Total budgeted cash collections are $2,604,000

Total budgeted inventory purchases are $1,656,000

Budgeted cash payments for inventory purchases are $1,605,600

Budgeted cash balance on June 30 is $315,400

Budgeted net income is $395,000

Budgeted total assets on June 30 is $1,775,400

Cash provided by operating activities is $391,400