Master Budget with Supporting Schedules

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 budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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-$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual) 20,000	May (budget) 100,000
February (actual) 26,000	June (budget) 50,000
March (actual) 40,000	July (budget) 30,000
April (budget) 65,000	August (budget) 28,000
	September (budget) 25,000

The concentration of sales before and during May is due to Mothers Day. Sufficient inventory should be on hand at the end of each month to support 40% of the earrings sold in the following month.

Suppliers are paid $8 for a pair of earrings. 60% of a months purchases is paid for in the month of purchase; the remaining balance 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 30% of a months sales are collected in the month of sale. An additional 60% is collected in the following month, and the remaining 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 commissions4% of sales

Fixed:

Advertising..$200,000

Rent .$18,000

Salaries..$106,000

Utilities...$7,000

Insurance..$3,000

Depreciation..$14,000

Insurance is paid on an annual basis, in November of each year.

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.

A listing of the companys ledger accounts as of March 31 is given below:

Assets

Cash $ 74,000

Accounts receivable ($26,000 February sales;

$320,000 March sales).. 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

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.

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 of the accumulated interest on the loan and as much of the loan as possible, while still retaining $50,000 in cash.

Required:

1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
   1. A sales budget, by month and in total.
   2. A schedule of expected cash collections from sales, by month and in total.
   3. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
   4. 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 Pro forma Income Statement for the three month period ending June 30.
4. A Pro forma Statement of Retained Earnings for the period ending June 30.
5. A Pro forma Balance Sheet as of June 30.
6. A Pro forma Statement of Cash Flow for the period ending June 30. (Optional)

General Instructions

1. This assignment must be completed using Excel. I recommend that you work with a partner.
2. Rename the file: Name1 Name 2 Budget Spring 2020.
3. A draft of the project is due no later than April 15. Submit to Canvas.
4. You may come for help anytime before April 19. I will continue to answer specific questions until the due date. However, I will not work through major issues after April 19.
5. This assignment is due on April 20. Submit to Canvas.
6. All schedules must be labeled to indicate where the information will be subsequently used.
7. All financial statements must be labeled to indicate from what schedule the information came.
8. Submit to Canvas, no printed copy is necessary. Include your name and section number on the input page.
9. All numbers must be on the input page. All budgets, schedules, and Financial Statements may only contain formulas.
10. The Cash Flow Statement is optional (extra credit)
11. Calculations for borrowings should be done manually on the input page. You are not required to develop the formulas necessary to calculate the amount of borrowing and repayment within the Cash Budget.
12. The template for the solution is posted in Canvas.