Early one morning in March, Jordan Buford was preparing his daily work when his boss, Olivia Anton, approached him and announced, Little Annin Flagmakers (LAF) has submitted an application for a line of credit (LOC) for April through June. I wantyou to prepare budgeted financial statements similar to the ones you prepared for our last LOC applicant. I need this by 3 PM today for the 4 PM credit committee meeting. Be prepared to make a loan recommendation and to address questions from the credit committee. I have cleared your schedule. Let me know if you need anything. Kent Bankis a state bank with multiple branches that offers a variety of services for personal and commercial needs. The bank has been serving the local community for over 110 years and prides itself on its personalized approach to provide financial services, local management, long-term stability and a full range of deposit and lending products and services. Commercial credit decisions at Kent Bankare made by the Commercial Credit Committee, which consists of the senior commercial credit analyst and two vice presidents. Jordan was recently hired by Kent Bankas a commercial credit analyst, to provide analysis for commercial loan applications. During his undergraduate studies, he studied accounting and finance and shortly after graduation passed the CMA exam. Jordan reports directly to Olivia Anton, the senior commercial credit analyst who has been with Kent Bankfor ten years. As Jordan began the work, he recalled his last line of credit (LOC) analysis and how well received it was. He had taken the information provided by the company and developed master budgets in Excel that used an input section with numbers that could be changed for assessing different scenarios. The committee had specifically asked about the effect on the applicants cash needs would be if sales were reduced by 2%, 5%, and 10%. He wanted to be prepared for these types of questions. LITTLE ANNIN FLAGMAKERS BACKGROUND Little Annin Flagmakers (LAF) manufactures one product, a large durable 8 x 12 American flag, which it sells for US$125. Because of the large size of the flag, this product is not sold in stores; rather, it is sold through a relatively small number of on-line retailers. Each quarter, retailers estimate sales for the upcoming five months, revising proximate sales as necessary. In general, the retailers are reasonably good at estimating their sales needs; however, some variation in demand does occur and the retailers expect to be able to adjust orders as needed. LAF allows retailers to adjust each months purchases to 80-120 percent of the estimated sales levels. Flags are shipped to retail customers using JIT distribution so that the on-line retailers do not have to store inventory.

[Typical sales for the flag are 1,800 units per month with seasonal increases April through August. Sales estimates are April 2,000 units, May 3,000 units, June 4,000 units, July 2,000 units, and August 1,000 units. Customers historically have paid 40percent of their purchases in the month of the sale, 55percent in the following month, and the remaining five percent is uncollectible. MANUFACTURING AND SG&A COSTS The flags are made in one plant which has a capacity of6,200 units per month. LAF budgets to have 20 percent of next months sales in finished goods inventory at the end of each month. There is plenty of storage space for finished goods. Fabric is the only direct material and each flag requires 7pounds of fabric at US$5per pound. LAF plans to have 45percent of next months fabric needs on hand at the end of the month. Fabric is purchased on credit with 55percent paid in the month of purchase and 45percent the next month. The standard direct labor hours to manufacture one flag is 0.50 hours at US$30 per hour. For simplicity, direct labor costs are budgeted as if they were paid when incurred. Manufacturing overhead rates are computed quarterly and applied based on direct labor hours. Fixed manufacturing overheadcosts are estimated to be US$60,000 per month, of which US$20,000 is PPE depreciation. Variable manufacturing overhead, including indirect materials, indirect labor, and other costs, is estimated at US$10 per direct labor hour. The selling and administrative expenses include variable selling costs (primarily shipping) of US$1.40per unit, and fixed costs of US$65,000 per month of which US$10,000 is deprecation of the administrative office building and equipment. FINANCIAL STATEMENT DETAILS AND CASH PLANNING Little Annin Flagmakers uses FIFO inventory valuation. As of March 31, the expected finished goods inventory is 500 units, valued at US$70per unit.The company expects to have 4,500 pounds of fabric on hand, valued at US$5per pound. Other expected account balances include: accounts payable at US$65,000, accounts receivable at 132,000, cash at US$57,695, land at US$520,000, and building and equipment at US$1,800,000 with accumulated depreciation of US$750,000. LAF has no long-term debt; common stock is valued at US$500,000 and is not expected to change during the quarter; expected retained earnings as of March 31 are US$1,247,695. Little Annin Flagmakers budgets for US$35,000 ending cash balance each month and is requesting a line of credit that will allow it to adjust for its cash needs. The dividends of US$15,000 are paid each month. During the quarter, LAF planned to purchase equipment in May and June for US$47,820 and US$154,600 respectively. This equipment is being purchased to increase capacity and is not expected to come on-line until after the quarter, thus not affecting the manufacturing overhead costs. LOAN DETAILS Little Annin Flagmakers has requested a line of credit of US$60,000 to cover production costs during the seasonal increase in business. Kent Bankuses the following terms on its lines of credit. All borrowing is done at the beginning of the month, in whole dollar increments. All repayments are made at the end of the month, in whole dollar increments. The full line of credit is expected to be paid off by the end of the quarter with all of the interest repaid at the end of the quarter. The interest rate on this loan is 16 percent per year.

Input Data (USD) Yellow-use only cell references Blue-may type numbers here Little Annin Flagmakers Sales Budget (USD) April May June Quarter Budgeted sales April (units) May (units) June (units) July (units) August (units) Expected 2,000 3,000 4,000 2,000 1,000 Budgeted Sales (units): Selling Price per unit: Total Sales: Selling Price/unit $ 125.00 Little Annin Flagmakers Schedule of Expected Cash Collections (USD) April May June Quarter Cash collection pattern Month of sale Following month Uncollectible Accounts Receivable Beginning Balance 40% 55% 5% April Sales May Sales Cash payments for materials Month of purchase Following month 55% 45% June Sales Total Cash Collections: Accounts Receivable, June 30: Production requirements Raw material per unit (lb) Raw mat. cost per Ib Direct labor hours per unit Direct labor rate per hour Variable MOHD per DL hour Fixed MOHD per month Depreciation in Fixed MOHD 7 $5.00 0.5 $30.00 $10 $60,000 $20,000 Little Annin Flagmakers Production Budget April May June Quarter July August Selling & administrative costs Variable S&A cost per unit sold Fixed S&A cost per month Depreciation in Fixed S&A cost Budgeted Sales Add: Desired ending inventory Total Needs Less: Beginning inventory Required Production $1.40 $65,000 $10,000 Little Annin Flagmakers Direct Materials Budget (USD) April May June Quarter Other cash outflows Cash dividends paid each month Equipment purchases May Equipment purchases June $15,000 $45,000 $150,000 Desired ending inventory Finished Goods Raw Materials Cash ($) 20% 45% $35,000 Required Production in units Raw Materials per unit (lbs) Production Needs (lbs) Add: Desired ending inventory Total Needs Less: Beginning inventory Raw Materials to be purchased Cost of Raw Materials: Total Cost of Raw Materials Beginning account balances - March 31 Cash ($) $ 57,695 Accounts Receivable ($) $ 132,000 Finished Goods inventory $ 30,750 FG cost per unit $70.00 FG inventory (units) 500 Raw Materials inventory $ 22,250 Raw Materials (lb) 4,500 Accounts Payable ($) $ 65,000 Little Annin Flagmakers Schedule of Expected Cash Disbursements for Material (USD) April May June Quarter Accounts Payable Beginning Balance April Purchases May Purchases Land Buildings and equipment Accumulated Depreciation Common stock Retained earnings $520,000 $1,800,000 ($750,000) $500,000 $1,247,695 June Purchases Total Cash Disbursements For Materials Accounts Payable, June 30: Little Annin Flagmakers Direct Labor Budget (USD) April May June Quarter Units to be produced DL hours per unit Total DL hours needed DL cost per hour Total direct labor cost Little Annin Flagmakers Manufacturing Overhead Budget (USD) April June May Quarter Budgeted DL hours Variable MOHD rate Total Variable MOHD Fixed MOHD Expense Total MOHD Expense Less: Depreciation Cash disbursements for MOHD M-OHD rate DLH Little Annin Flagmakers Unit Product Cost (USD) Quantity Cost Cost/unit Absorption cost per unit Direct Materials Direct Labor Manufacturing Overhead Unit Product Cost Little Annin Flagmakers Cost of Goods Sold Budget (USD) Units Cost/unit Total Cost Cost of Goods Sold (FIFO) Beg. FG inventory Add: Cost of Goods Mfg'd Good Available for Sale Less: Ending FG inventory Cost of Good Sold Quarter Little Annin Flagmakers Selling and Administrative Expense Budget (USD) April May June Budgeted sales in units Variable S&A per unit Total Variable S&A Total Fixed S&A Total S&A Expense Less: Depreciation Cash Disbursements for S&A Little Annin Flagmakers Cash Budget (USD) April May June Quarter Cash Balance, Beginning Add: Receipts Cash Collections Total Cash Available Less Disbursements: Direct Materials Direct Labor Manufacturing Overhead Selling and Administrative Dividends Equipment Purchases Total Disbursements Excess (deficiency) of cash available: Financing Borrowing Repayments Interest Total Financing Cash Balance, ending Little Annin Flagmakers Budgeted Income Statement (USD) Quarter Ending: June 30 Net Sales Less: Cost of Goods Sold Gross Margin Less: S&A Expenses Net Operating Income Less: Interest Expense Net Income Computation of Net Sales: Sales: Less uncollectible amounts: Net Sales: Little Annin Flagmakers Budgeted Balance Sheet (USD) Ending March 31st Ending June 30th Current Assets Cash Accounts Receivable Raw Materials Inventory Finished Goods Inventory Plant and Equipment: Land Buildings and Equipment Accumulated Depreciation Total Assets: Liabilities: Accounts Payable Stockholder's Equity: Common Stock Retained Earnings Total Liabilities and stockholder's equity: Input Data (USD) Yellow-use only cell references Blue-may type numbers here Little Annin Flagmakers Sales Budget (USD) April May June Quarter Budgeted sales April (units) May (units) June (units) July (units) August (units) Expected 2,000 3,000 4,000 2,000 1,000 Budgeted Sales (units): Selling Price per unit: Total Sales: Selling Price/unit $ 125.00 Little Annin Flagmakers Schedule of Expected Cash Collections (USD) April May June Quarter Cash collection pattern Month of sale Following month Uncollectible Accounts Receivable Beginning Balance 40% 55% 5% April Sales May Sales Cash payments for materials Month of purchase Following month 55% 45% June Sales Total Cash Collections: Accounts Receivable, June 30: Production requirements Raw material per unit (lb) Raw mat. cost per Ib Direct labor hours per unit Direct labor rate per hour Variable MOHD per DL hour Fixed MOHD per month Depreciation in Fixed MOHD 7 $5.00 0.5 $30.00 $10 $60,000 $20,000 Little Annin Flagmakers Production Budget April May June Quarter July August Selling & administrative costs Variable S&A cost per unit sold Fixed S&A cost per month Depreciation in Fixed S&A cost Budgeted Sales Add: Desired ending inventory Total Needs Less: Beginning inventory Required Production $1.40 $65,000 $10,000 Little Annin Flagmakers Direct Materials Budget (USD) April May June Quarter Other cash outflows Cash dividends paid each month Equipment purchases May Equipment purchases June $15,000 $45,000 $150,000 Desired ending inventory Finished Goods Raw Materials Cash ($) 20% 45% $35,000 Required Production in units Raw Materials per unit (lbs) Production Needs (lbs) Add: Desired ending inventory Total Needs Less: Beginning inventory Raw Materials to be purchased Cost of Raw Materials: Total Cost of Raw Materials Beginning account balances - March 31 Cash ($) $ 57,695 Accounts Receivable ($) $ 132,000 Finished Goods inventory $ 30,750 FG cost per unit $70.00 FG inventory (units) 500 Raw Materials inventory $ 22,250 Raw Materials (lb) 4,500 Accounts Payable ($) $ 65,000 Little Annin Flagmakers Schedule of Expected Cash Disbursements for Material (USD) April May June Quarter Accounts Payable Beginning Balance April Purchases May Purchases Land Buildings and equipment Accumulated Depreciation Common stock Retained earnings $520,000 $1,800,000 ($750,000) $500,000 $1,247,695 June Purchases Total Cash Disbursements For Materials Accounts Payable, June 30: Little Annin Flagmakers Direct Labor Budget (USD) April May June Quarter Units to be produced DL hours per unit Total DL hours needed DL cost per hour Total direct labor cost Little Annin Flagmakers Manufacturing Overhead Budget (USD) April June May Quarter Budgeted DL hours Variable MOHD rate Total Variable MOHD Fixed MOHD Expense Total MOHD Expense Less: Depreciation Cash disbursements for MOHD M-OHD rate DLH Little Annin Flagmakers Unit Product Cost (USD) Quantity Cost Cost/unit Absorption cost per unit Direct Materials Direct Labor Manufacturing Overhead Unit Product Cost Little Annin Flagmakers Cost of Goods Sold Budget (USD) Units Cost/unit Total Cost Cost of Goods Sold (FIFO) Beg. FG inventory Add: Cost of Goods Mfg'd Good Available for Sale Less: Ending FG inventory Cost of Good Sold Quarter Little Annin Flagmakers Selling and Administrative Expense Budget (USD) April May June Budgeted sales in units Variable S&A per unit Total Variable S&A Total Fixed S&A Total S&A Expense Less: Depreciation Cash Disbursements for S&A Little Annin Flagmakers Cash Budget (USD) April May June Quarter Cash Balance, Beginning Add: Receipts Cash Collections Total Cash Available Less Disbursements: Direct Materials Direct Labor Manufacturing Overhead Selling and Administrative Dividends Equipment Purchases Total Disbursements Excess (deficiency) of cash available: Financing Borrowing Repayments Interest Total Financing Cash Balance, ending Little Annin Flagmakers Budgeted Income Statement (USD) Quarter Ending: June 30 Net Sales Less: Cost of Goods Sold Gross Margin Less: S&A Expenses Net Operating Income Less: Interest Expense Net Income Computation of Net Sales: Sales: Less uncollectible amounts: Net Sales: Little Annin Flagmakers Budgeted Balance Sheet (USD) Ending March 31st Ending June 30th Current Assets Cash Accounts Receivable Raw Materials Inventory Finished Goods Inventory Plant and Equipment: Land Buildings and Equipment Accumulated Depreciation Total Assets: Liabilities: Accounts Payable Stockholder's Equity: Common Stock Retained Earnings Total Liabilities and stockholder's equity