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CASE 9-30 Master Budget with Supporting Schedules L02, L04, Lo8, L09, LO10] You have just been hired as a new management trainee by Earings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the com- pany has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. ncere Since you are well trained in 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-$10 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)20,000June (budget)50,000 February (actual) . . 26,000 July (budget). 30,000 March (actual).40,000 August (budget).... 28,000 April (budget) ..65,000 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 mooth 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 operating expenses for the company are given below: ioni onow8 Saie bad debts have been heghgible. Monthly operating expenses for the company are given below: Variable: Fixed: $200,000 $18,000 $106,000 $7,000 $3,000 Salaries Utilities. 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 company's ledger accounts as of March 31 is given below: Assets Accounts receivable ($26,000 February sales $320,000 March sales)... Inventory . . Prepaid insurance. .. 346,000 104,000 21,000 950,000 Liabilities and Stockholders' Equity Accounts payable. . 100,000 15,000 800,000 Capital stock 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 (in increments of $1,000), while still retaining at least $50,000 in cash. Ranirad (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 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 disbursements for merchandise purchases, by month and in total. 2. 3. 4. A budgeted balance sheet as of June 30 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 A budgeted income statement for the three-month period ending June 30. Use the contribution approach. EARRINGS UNLIMITED Budgets April May June Quarter Requirement 1a. Sales budget Budgeted sales in units Selling price per unit Total sales 65,000 S10 $650,000 50,000 $10 $500,000 100,000 215,000 $1t0 $1,000,000 $2.150,000 Comect Comect Correct Cormect Requirement 1b. Schedule of expected cash collections: February sales March sales April sales May sales June sales Total cash collections $26,000 280,000 130,000 $26,000 320,000 650,000 900,000 100,000 $1,996,000 40,000 455,000 200,000 65,000 700,000 100,000 $865,000 $436,000 $695,000 Correct Correct Correct For the Three Months Ending June 30 43 Ma $50,000 865,0001996.000 915,000 $74,000 45 46 Cash balance, beginning Add receipts from customers Total cash available Less disbursements $74,000 436,000 510,000 $50,000 695,000 745,000 2,070,000 48 49 50 51 52 53 54 318,000 200,000 18,000 106,000 40,000 7,000 16,000 244,000 20,000 8,000 106,000 20,000 7,000 40,000 820,000 600,000 54,000 318,000 86,000 21,000 56,000 15,000 1,970,000 258,000 200,000 18,000 106.000 26,000 Merchandise purchases Advertising Salaries Commissions (4% of sales) Utilities Equipment purchases Dividends paid Total disbursements Excess (deficiency) of receipts over disbursements Financing 56 57 15,000 630,000 705,000 455,000 100,000 59 60 (120,000) 40,000 180,000 (180,000) (5,300) 300) $94,700 170,000 10,000 Bormowings Repayments Interest Total financing Cash balance, ending (180,000) 53,000 (185,300) 62 170,000 $50,000 10,000 $50,000 65 $94.700 68 69 70 71 72 73 74 75 76 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 78 79 80 81 8 Contribution margin Fixed expenses Advertising Rent Salaries Utilities Insurance Depreciation 84 85 86 87 Net operating income Less interest expense Net income Prepaid insurance Property and equipment, net Total assets 12,000 964,000 $1,618,700 Liabilities and Equity Accounts payable, purchases Dividends payable Capital stock no par Retained eamings Total liabilities and equity $84,000 15,000 800,000 $1,618,700 Correct Accounts receivable at June 30: May sales June sales Total Retained eamings at June 30: Balance, March 31 Add net income Total Less dividends declared Balance, June 30