EARRINGS UNLIMITED
Minimum ending cash balance	$50,000
Selling price	$10
Recent and forecast sales:(in units)
January (actual)	20,000
February (actual)	26,000
March (actual)	40,000
April	65,000
May	100,000
June	50,000
July	30,000
August	28,000
September	25,000
Desired ending inventories (percentage	40%
of next month's sales)
Cost of earrings	$ 4
Purchases paid as follows:
In month of purchase	50%
In following month	50%
Collection on sales:
Sales collected current month	20%
Sales collected following month	70%
Sales collected 2nd month following	10%
Variable monthly expenses:
Sales commissions (% of sales)	4%
Fixed monthly expenses:
Advertising	$ 200,000
Rent	$ 18,000
Salaries	$ 106,000
Utilities	$ 7,000
Insurance (12 months paid in November)	$ 3,000
Depreciation	$ 14,000
Equipment purchased in May	$ 16,000
Equipment purchased in June	$ 40,000
Dividends declared each quarter	$ 15,000
Balance sheet at March 31:
Assets
Cash	$74,000
Accounts receivable	346,000
Inventory	104,000
Prepaid insurance	21,000
Property and equipment (net)	950,000
Total assets	$1,495,000
Liabilities and Stockholders' Equity
Accounts payable	$100,000
Dividends payable	15,000
Capital stock	800,000
Retained earnings	580,000
Total liabilities and stockholders' equity	$1,495,000
Agreement with Bank:
Borrowing increments	$1,000
Interest rate per month	1%
Repayment increments	$1,000
Total of interest paid each quarter	100%
Required minimum cash balance	$50,000

EARRINGS UNLIMITED
Budgets
	April	May	June	Quarter
Requirement 1a. Sales budget:
Budgeted sales in units
Selling price per unit
Total sales
Requirement 1b. Schedule of expected cash collections:
February sales
March sales
April sales
May sales
June sales
Total cash collections
Requirement 1c. Merchandise purchases budget:
Budgeted unit sales
Add desired ending inventory
Total needs
Less beginning inventory
Required purchases in units
Unit cost
Required dollar purchases
Requirement 1d. Budgeted cash disbursements for merchandise purchases:
Accounts payable
April purchases
May purchases
June purchases
Total cash disbursements
Requirement 2:
EARRINGS UNLIMITED
Cash Budget
For the Three Months Ending June 30
	April	May	June	Quarter
Cash balance, beginning
Add receipts from customers
Total cash available
Less disbursements:
Merchandise purchases
Advertising
Rent
Salaries
Commissions (4% of sales)
Utilities
Equipment purchases
Dividends paid
Total disbursements
Excess (deficiency) of receipts
over disbursements
Financing:
Borrowings
Repayments
Interest
Total financing
Cash balance, ending
Requirement 3:
EARRINGS UNLIMITED
Budgeted Income Statement
For the Three Months Ending June 30
Sales in units
Sales
Variable expenses:
Cost of goods sold
Commissions
Contribution margin
Fixed expenses:
Advertising
Rent
Salaries
Utilities
Insurance
Depreciation
Net operating income
Less interest expense
Net income
EARRINGS UNLIMITED
Budgeted Balance Sheet
June 30
Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Property and equipment, net
Total assets
Liabilities and Equity
Accounts payable, purchases
Dividends payable
Capital stock, no par
Retained earnings
Total liabilities and equity
Accounts receivable at June 30:
May sales
June sales
Total
Retained earnings at June 30:
Balance, March 31
Add net income
Total
Less dividends declared
Balance, June 30

Preview File Edit View Go Tools Window Help 1 0 M A ABC $ 57% Q . Tue Apr 11 2:52 PM Chapter 8 Group Exercise Earrings Unlimited.pdf Page 1 of 2 1 Q Q " J . ' A QV Search Chapter 8 Grou... Chapter 8 Budget Exercise - Earrings Unlimited: You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting as are result of your Managerial Accounting class at Pima College, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price-$10 per pair. Actual sales of 1 earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) 20,000 June (budget) 50,000 February (actual) 26,000 July (budget 30,000 March (actual 40,000 August (budget) 28,000 April (budget) $5,000 September (budget) 25,000 May (budget) 100,000 The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Suppliers 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. 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 2 10% is collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below: Variable: Sales commissions 4% of sales Fixed: Advertising $ 200,000 Rent $ 18,000 Salaries $ 106,000 Utilities $ 7,000 nsurance $ 3,000 Depreciation $ 14,000 Insurance is paid on an annual basis, in November of each year. Capital Expenditures: The company plans to purchase $16,000 in new equipment during 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. + APR 11 4 kindle WPreview File Edit View Go Tools Window Help M A ABC $ 56% Q . Tue Apr 11 2:52 PM Chapter 8 Group Exercise Earrings Unlimited.pdf Page 2 of 2 Qu Search Chapter 8 Grou... Chapter 8 Budget Exercise - Earrings Unlimited page 2 of 2 The company's balance sheet as of March 31 is given below: Assets Cas $ 74,000 Accounts receivable ($26,000 February sales; $320,000 March sales) 346,000 Inventory 104,00 Prepaid insurance 21,000 Property and equipment (net) 950,000 Total asset $ 1,495,000 Liabilities and Stockholders' Equity Accounts payable $ 100,000 Dividends payable 15,000 Common stock 300,00 Retained earnings 580,000 Total liabilities and stockholders' equity $ 1,495,000 The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. 2 The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: 1. a. A sales budget, by month and in total. b. A schedule of expected cash collections, 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 disbursements 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 pproach. 4. A budgeted balance sheet as of June 30. + APR kindle 11 4 W