Elliott Industries Budgeting Problem

Elliott Industries, a wholesale company, is considering whether to open a new distribution center. The center would open January 1, 2021. To make the decision, the planning committee requires a master budget for the centers first quarter of operation (January, February, and March of 2022).

Required

You are to construct the first quarter master budget based on the following expectations:

a. January sales are estimated to be $400,000 of which $100,000 will be cash sales and $300,000 will be on credit. The company expects sales to grow 10% per month for the first few months of operation. Prepare a sales budget for the first quarter.

b. The company expects to collect 100% of accounts receivable in the month following the sale. Prepare a schedule of expected cash receipts for the first quarter.

c. Cost of goods sold will be 60% of sales. Company policy is to budget an ending inventory balance equal to 25% of the next months projected cost of goods sold. Assume Elliott expects April cost of goods sold to be $314,000. Prepare an inventory purchases budget.

d. All inventory purchases are on account. The company pays 70% of accounts payable in the month of purchase. It pays the remaining 30% in the following month. Prepare a schedule of expected cash payments for inventory purchases.

e. Budgeted monthly selling and administrative expenses are:

Salary Expense (Fixed)	$24,000
Sales Commissions	5% of Sales
Supplies Expense	2% of Sales
Utilities (Fixed)	$ 1,400
Depreciation on Center Equipment (Fixed)*	$ 750
Rent (Fixed)	$ 3,600
Miscellaneous (Fixed)	$ 900

*The capital expenditures budget shows that Elliott must purchase $100,000 of equipment on January 1 to establish the new center. The equipment supplier allows a thirty-day trial period. Elliott will pay for the equipment on January 31. The equipment is expected to have a 10-year useful life and a $10,000 salvage value. Prepare a selling and administrative expense budget.

f. Sales commissions and utilities are paid in the month after the month in which they are incurred. All other expenses are paid in the month they are incurred. Prepare a schedule of cash payments for selling and administrative expenses.

g. Using a line of credit, Elliott borrows and repays principal in increments of $1,000 on the last day of the month as needed. It pays interest of 1 percent per month in cash on the last day of the month. Company policy is to maintain an ending cash balance of at least $12,000. Use this information and the schedules prepared in requirements b, e, and f to prepare a cash budget.