Case 2. Annual Budget and Budgeted Financial Statements This case study provides practice in preparing an annual budget for a company, including budgeted financial statements. This case is not a group project. Instead, you are required to complete this case on your own. You must upload your submission to the Canvas website by the due date indicated in the course schedule. Facts Lux Enterprises Inc. (Lux) is a wholesale distributor of earrings. At the start of its second quarter (Q2), Lux hires you to manage its operations. Lux has not prepared budgets in the past, but you decide to prepare a budget for Q2. Lux sells many styles of earrings, all at a selling price of $10 per pair. Actual unit sales for Q1 and budgeted unit sales for Q2 and Q3 are as follow: Actual Unit Sales Budgeted unit Sales January 20,000 April 65,000 July 30,000 February 26,000 May 100,000 August 28,000 March 40,000 June 50,000 September 25,000 The concentration of sales in the spring is due to Mothers Day. All inventory sales are made on credit and bad debts are negligible. Lux collects 20% in the month of sale, 70% in the following month, and 10% in the second month following the sale. Luxs only cash collections are from inventory sales. Lux maintains an ending inventory balance sufficient to supply 40% of the budgeted unit sales in the following month. Lux pays its suppliers $4 for a pair of earrings. All inventory purchases are paid 50% in the month of purchase and 50% in the following month. Luxs monthly operating expenses, other than cost of goods sold, are as follows: Monthly Expenses Variable expenses: Sales commissions 3% of sales Fixed expenses: Advertising expense $200,000 Rent expense $18,000 Salary expense $106,000 Utility expense $7,000 Insurance expense $3,000 Depreciation expense $14,000 All expenses, other than insurance and depreciation, are paid in cash in the month the expense is incurred. Lux pays its annual insurance premium of $36,000 on November 1. Lux plans to

purchase for cash $26,000 of new equipment in May and $48,000 of new equipment in June. In March, Lux declared a $15,000 dividend which is payable on April 15. Luxs balance sheet on March 31 is as follows: Assets Cash $ 224,000 Accounts receivable [a] 346,000 Inventory [b] 104,000 Prepaid insurance 21,000 PP&E, net of depreciation 950,000 Total assets $1,645,000 Liabilities and Stockholders Equity Accounts payable [c] $ 100,000 Dividends payable 15,000 Common stock 800,000 Retained earnings 730,000 Total liabilities and stockholders equity $1,645,000 [a] Includes $26,000 of February sales (10%), plus $320,000 of March sales (80%) [b] 26,000 units (40% of budgeted sales in April) at $4 per unit [c] 50% of inventory purchases in March Required Prepare a master budget for the second quarterApril, May, and June. Include the following detailed schedules: 1. Sales budget, by month and in total 2. Merchandise purchases budget, by month and in total 3. Budgeted cash collections from inventory sales, by month and in total 4. Budgeted cash payments for inventory purchases, by month and in total 5. Comprehensive cash budget, by month and in total 6. Budgeted contribution margin income statement for three months ending June 30 7. Budgeted balance sheet as of June 30 8. Budgeted statement of cash flows for three months ending June 30 Templates, check figures and some hints to help you get started can be found on the following pages. You can perform the calculations by hand, or you can create the budget using the Excel worksheets for Case 2. Regardless of whether you perform the calculations by hand or in Excel, your solution must be in the format indicated by the templates.

1. Sales Budget, Q2 April May June Quarter Budgeted unit sales 65,000 Selling price per unit $10 Total sales revenue $650,000 2. Merchandise Purchases Budget, Q2 April May June Quarter Budgeted unit sales 65,000 + Desired ending inventory 40,000 Total units needed 105,000 Beginning inventory 26,000 Required purchases 79,000 Per-unit cost $4 Merchandise purchases $316,000 3. Budgeted Cash Collections from Inventory Sales, Q2 April May June Quarter February sales (10%, 0%, 0%) $ 26,000 March sales (70%, 10%, 0%) 280,000 April sales (20%, 70%, 10%) 130,000 May sales (0%, 20%, 70%) 0 June sales (0%, 0%, 20%) 0 Total cash collections $436,000 4. Budgeted Cash Payments for Inventory Purchases, Q2 April May June Quarter Accounts payable, March 31 (100%, 0%, 0%) $100,000 April purchases (50%, 50%, 0%) 158,000 May purchases (0%, 50%, 50%) 0 June purchases (0%, 0%, 50%) 0 Total cash payments $258,000

5. Comprehensive Cash Budget, Q2 April May June Quarter Beginning cash balance $ 224,000 + Collections from customers 436,000 Cash payments Inventory purchases (258,000) Advertising expense (200,000) Rent expense (18,000) Salary expense (106,000) Utility expense (7,000) Sales commissions (19,500) Purchases of PP&E 0 Dividends paid (15,000) Ending cash balance $ 36,500 6. Budgeted Income Statement, Q2 (3 months) Sales ? Variable costs Cost of goods sold ? Sales commissions ? Contribution margin ? Fixed costs Advertising expense ? Rent expense ? Salary expense ? Utility expense ? Insurance expense ? Depreciation expense ? Net income ?

7. Budgeted Balance Sheet, June 30 Assets Cash Accounts receivable Inventory Prepaid insurance PP&E, net of depreciation Total assets Liabilities and Stockholders Equity Accounts payable Common stock Retained earnings Total liabilities and stockholders equity 8. Budgeted Statement of Cash Flows, Q2 Cash provided by operating activities Net income ? + Depreciation ? Increase in accounts receivable ? + Decrease in inventory ? + Decrease in prepaid insurance ? Decrease in accounts payable ? Total ? Cash used in investing activities Equipment purchases ? Cash used in financing activities Dividends paid ? Increase in cash ? Check figures: Budgeted sales revenue in Q2 is $2,150,000 Budgeted inventory purchases in Q2 are $804,000 Budgeted cash collections in Q2 are $1,996,000 Budgeted cash payments for inventory purchases in Q2 are $820,000 Budgeted cash balance on June 30 is $253,500 Budgeted net income in Q2 is $181,500 Budgeted total assets on June 30 is $1,795,500 Cash provided by operating activities in Q2 is $118,500