Case Study $6-1$ Master Budget

Lunar Artistry Company needs to purchase new etching and finishing equipment. The owners hope to finance the costly equipment with cash on hand and a short term loan from Erie Bank. The CFO of Lunar Artistry Company has recently completed the sales forecast. She projects sales to increase by $10\%$ each month over the previous month sales for the first quarter with the remaining months remaining constant.

The controller has been asked to prepare the master monthly budget for the first quarter $2021.$ In the process, the controller has accumulated the following information:

$1.$ Projected Sales for December $2020$ are $$500,000.$ Credit sales are $80\%$ of total sales with immediate cash sales as the other $20\%.$ Of the credit sales, cash is collected $20\%$ in the month of the sale and the remainder in the month following the sale.

$2.$ Lunar$$s cost of goods sold is generally $60\%$ of the current month sales. All inventory is purchased on account. $40\%$ of inventory purchases are paid for in the month of purchase with the remaining $60\%$ paid the month following the purchase.

$3.$ The controller has determined additional monthly expenses to be as follows:

a$.$ Salaries $$55,000$ Paid monthly

b$.$ Advertising $$20,000$ Paid Monthly

c$.$ Property Taxes $ $2,900$ Paid Feb $28$ and Aug $31$

d$.$ Sales Commissions $1\mathrm{.}2\%$ of monthly sales

$4.$ The owners of Lunar Artistry Company have selected etching and finishing equipment costing $$175,000.$ They plan to pay cash for the equipment. If they do not have enough cash, assuming the company can maintain a $$25,000$ balance, the owners will take a short term loan from Erie Bank. The CFO has stated the current interest rate on short term loans is $6\%$ and she anticipates the need for a six$-$month loan. Interest on short$-$term loans is payable monthly.

$5.$ Interest is paid each March $31$ and September $30$ on the Mortgage Payable. The interest rate on the mortgage is $4\%$

$6.$ The board of directors intends to declare a $$40,000$ dividend at the end of the first quarter.

REQUIRED:

$1.$ Using the Excel template, complete the sales budget, cash receipt budget, purchase budget, cash disbursement budget and cash budget.

$2.$ Prepare the Budgeted Income Statement, Budgeted Statement of Equity and Budgeted Balance Sheet.

$3.$ As the CFO, write a short memo to the owners recommending whether to purchase the equipment and an appropriate month to make the purchase.