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Chapter 14 1. Butler Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers, the company gives divisional management a bonus equal to 17 percent of the excess of actual net income over budgeted net income. The following is French Division's current year's performance. Sales revenue Cost of goods sold Current Year $ 4,000,000 2,300,000 Gross profit Selling & admin. expenses Net income 1,700,000 820,000 $ 880,000 The president has just received next year's budget proposal from the vice president in charge of French Division. The proposal budgets a 6 percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled. French has enjoyed revenue growth of around 11 percent for each of the past five years. The president had consistently approved the division's budget proposals based on 6 percent growth in the past. This time, the president wants to show that he is not a fool. \"I will impose a 16 percent revenue increase to teach them a lesson!\" the president says to himself smugly. Assume that cost of goods sold and selling and administrative expenses remain stable in proportion to sales. a. Prepare the budgeted income statement based on French Division's proposal of a 6 percent increase. b. If growth is actually 11 percent as usual, how much bonus would French Division's executive officers receive if the president had approved the division's proposal? c. Prepare the budgeted income statement based on the 16 percent increase the president imposed. d. If the actual results turn out to be a 11 percent increase as usual, how much bonus would French Division's executive officers receive since the president imposed a 16 percent increase? 2 Sutton Pointers Corporation expects to begin operations on January 1, 2015; it will operate as a specialty sales company that sells laser pointers over the Internet. Sutton expects sales in January 2015 to total $240,000 and to increase 15 percent per month in February and March. All sales are on account. Sutton expects to collect 66 percent of accounts receivable in the month of sale, 24 percent in the month following the sale, and 10 percent in the second month following the sale. Required a. Prepare a sales budget for the first quarter of 2015. b. Determine the amount of sales revenue Sutton will report on the first 2015 quarterly pro forma income statement. c. Prepare a cash receipts schedule for the first quarter of 2015. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) d. Determine the amount of accounts receivable as of March 31, 2015. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) 3. Peabody, Inc., sells fireworks. The company's marketing director developed the following cost of goods sold budget for April, May, June, and July. Budgeted cost of goods sold April $66,000 May $76,000 June $86,000 July $92,000 Peabody had a beginning inventory balance of $3,900 on April 1 and a beginning balance in accounts payable of $14,500. The company desires to maintain an ending inventory balance equal to 10 percent of the next period's cost of goods sold. Peabody makes all purchases on account. The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the month following purchase. Required a. Prepare an inventory purchases budget for April, May, and June. b. Determine the amount of ending inventory Peabody will report on the end-of-quarter pro forma balance sheet. c. Prepare a schedule of cash payments for inventory for April, May, and June. d. Determine the balance in accounts payable Peabody will report on the end-of-quarter pro forma balance sheet. 4. Ruddy is a retail company specializing in men's hats. Its budget director prepared the list of expected operating expenses that follows. All items are paid when incurred except sales commissions and utilities, which are paid in the month following their incurrence. July is the first month of operations, so there are no beginning account balances. July August September Salary expense Sales commissi ons (4 percent of sales) Supplies expense Utilities Deprecia tion on store equipmen t Rent Miscella neous Total S&A expenses before interest $ $ 17,100 $ 17,100 $ 17,100 3,300 3,300 3,300 340 370 400 2,500 2,500 2,500 2,200 2,200 2,200 7,000 7,000 7,000 640 640 640 33,080 $ 33,110 a. Prepare a schedule of cash payments for selling and administrative expenses. b. Determine the amount of utilities payable as of September 30. c. Determine the amount of sales commissions payable as of September 30. 5.Newman Medical Clinic has budgeted the following cash flows. $ 33,140 Cash receipts Cash payments For inventory purchases For S&A expenses January February March $111,000 $117,000 $137,000 95,500 36,500 77,500 37,500 90,500 32,500 Newman Medical had a cash balance of $13,500 on January 1. The company desires to maintain a cash cushion of $10,000. Funds are assumed to be borrowed, in increments of $1,000, and repaid on the last day of each month; the interest rate is 3 percent per month. Repayments may be made in any amount available. Newman pays its vendors on the last day of the month also. The company had a monthly $40,000 beginning balance in its line of credit liability account from this year's quarterly results. 6. Top executive officers of Preston Company, a merchandising firm, are preparing the next year's budget. The controller has provided everyone with the current year's projected income statement. Sales revenue Cost of goods sold Gross profit Current Year $ 1,800,000 1,170,000 630,000 Selling & admin. expenses Net income 254,000 $ 376,000 Cost of goods sold is usually 65 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $74,000. The president has announced that the company's goal is to increase net income by 15 percent. a-1. Prepare a pro forma income statement. a-2. What percentage increase in sales would enable the company to reach its goal? b. The market may become stagnant next year, and the company does not expect an increase in sales revenue. The production manager believes that an improved production procedure can cut cost of goods sold by 2 percent. b-1. Prepare a pro forma income statement still assuming the President's goal to increase net income by 15 percent. b-2. Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income. c-1. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $341,000. With the increased advertising, the company expects sales revenue to increase by 15 percent. Assume that cost of goods sold remains a constant proportion of sales. Prepare a pro forma income statement. 7. Mulligan Fruits Corporation wholesales peaches and oranges. Kimberly Priest is working with the company's accountant to prepare next year's budget. Ms. Priest estimates that sales will increase 5 percent for peaches and 10 percent for oranges. The current year's sales revenue data follow. First Quarter P eac hes O ran ges T ota l $ 226,0 00 Second Quarter $ 417,0 00 $ 643,0 00 246,0 00 Third Quarter $ 467,0 00 $ 713,0 00 306,0 00 Fourth Quarter $ 587,0 00 $ 893,0 00 246,0 00 Total $ 397,0 00 $ 643,0 00 1,024, 000 1,868, 000 $ 2,892, 000 Based on the company's past experience, cost of goods sold is usually 70 percent of sales revenue. Company policy is to keep 15 percent of the next period's estimated cost of goods sold as the current period's ending inventory. (Hint: Use the cost of goods sold for the first quarter to determine the beginning inventory for the first quarter.) a. Prepare the company's sales budget for the next year for each quarter by individual product. b. If the selling and administrative expenses are estimated to be $660,000, prepare the company's budgeted annual income statement. c. Ms. Priest estimates next year's ending inventory will be $35,300 for peaches and $56,600 for oranges. Prepare the company's inventory purchases budgets for the next year, showing quarterly figures by product. (Round your answers to the nearest whole dollar amount.) Inventory purchases budget for peaches: 8. Haas Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2015. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks. Required a. & b. October sales are estimated to be $300,000, of which 30 percent will be cash and 70 percent will be credit. The company expects sales to increase at the rate of 30 percent per month. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a sales budget and a schedule of cash receipts. c. & d. The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month's cost of goods sold. However, ending inventory of December is expected to be $13,500. The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the following month. Assume that all purchases are made on account. Prepare an inventory purchases budget and a cash payments budget for inventory purchases. (Round your answers to the nearest whole dollar amount.) e. & f. Budgeted selling and administrative expenses per month follow. Salary expense (fixed) Sales commissions Supplies expense Utilities (fixed) Depreciation on store fixtures (fixed)* 18,80 0 5 percent of Sales 2 percent of Sales $ 2,200 $ 5,000 $ Rent (fixed) Miscellaneous (fixed) $ 5,200 $ 1,700 *The capital expenditures budget indicates that Haas will spend $204,000 on October 1 for store fixtures, which are expected to have a $24,000 salvage value and a three-year (36-month) useful life. Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a selling and administrative expenses budget and a cash payments budget for selling and administrative expenses. (Round your answers to nearest whole dollar amount.) g. Haas borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 2 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $20,000 cash cushion. Prepare a cash budget. (Any repayments/shortage which should be indicated with a minus sign. Round your answers to nearest whole dollar amount.) h. Prepare a pro forma income statement for the quarter. (Round your answers to nearest whole dollar amount.) i. Prepare a pro forma balance sheet at the end of the quarter. (Amounts to be deducted should be indicated by a minus sign.) j. Prepare a pro forma statement of cash flows for the quarter. (Amounts to be deducted should be indicated by a minus sign. Round your answers to nearest whole dollar amount.)