EARRINGS UNLIMITED
Minimum ending cash balance	$50,000		Dividends declared each quarter	$15,000
Selling price	$10
			Balance sheet at March 31:
Recent and forecast sales:
January (actual)	20,000		Assets
February (actual)	26,000		Cash	$74,000
March (actual)	40,000		Accounts receivable	346,000
April	65,000		Inventory	104,000
May	100,000		Prepaid insurance	21,000
June	50,000		Property and equipment (net)	950,000
July	30,000		Total assets	$1,495,000
August	28,000
September	25,000		Liabilities and Stockholders' Equity
			Accounts payable	$100,000
Desired ending inventories (percentage	40%		Dividends payable	15,000
of next month's sales)			Capital stock	800,000
Cost of earrings	$4		Retained earnings	580,000
			Total liabilities and equity	$1,495,000
Purchases paid as follows:
In month of purchase	50%		Annual interest	12%
In following month	50%
			You have just been hired as a new management trainee by Earrings
Collection on sales:			Unlimited, a distributor of earrings to various retail outlets located in
Sales collected current month	20%		shopping malls across the country. In the past, the company has
Sales collected following month	70%		done very little in the way of budgeting and at certain times of the
Sales collected 2nd month following	10%		year has experienced a shortage of cash.
Monthly expenses are:
Variable:			Since you are well trained in budgeting, you have decided to prepare
Sales commissions	4%		comprehensive budgets for the upcoming second quarter in order to
Fixed:			show management the benefits that can be gained from an integrated
Advertising	$200,000		budgeting program. To this end, you have worked with accounting
Rent	$18,000		and other areas to gather the information assembled on this page.
Salaries	$106,000
Utilities	$7,000		The company sells many styles of earrings, but all are sold for the
Insurance	$3,000		same price--$10 per pair. Actual sales of earrings for the last three
Depreciation	$14,000		months and budgeted sales for the next six months are listed on this
			page to the right.(in pairs of earrings)
Equipment purchased in May	$16,000		The concentration of sales before and during May is due to Mother's
Equipment purchased in June	$40,000		Day. Sufficient inventory should be on hand at the end of each
			month to supply 40% of the earrings sold in the following month.
Supplies are paid $4 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase; the other half
is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has
found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the
following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly expenses are listed above for both fixed and variable. Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,000 in new equipment in May and $40,000 in new equipment during June; both purchases
will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.
A listing of the company's ledger accounts as of March 31 is given above in the form of a balance sheet.
The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayment
are made at the of a month. The annual interest rate is 12%. Interest is computed and paid at the end of each quarter on all
loans outstanding during the quarter.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
1. a. A sales budget, by month and in total.
. b. A schedule of expected cash collections from sales, by month and in total.
. c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursement for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the
minimum cash balance of $50,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet.