Q5 Example 1: To illustrate the budget process for merchandising firms, a hypothetical office supplies specialty store in Addis Ababa called ANC Company will be considered. The company prepares its master budget on a quarterly basis. The following data have been assembled to assist in the preparation of the master budget for the first quarter of 2005:

(a) As of December 31, 2004, the company's general ledger showed the following account balances:

DebitCredit

Cash

Account receivable224,000

Inventory60,000

Building and equipment 370,000

Account Payable 93,000

Capital stock500,000

Retained earnings 109,000

Total702,000702,000

(b) Actual sales for December 2004 and budgeted sales for the next four months of 2005 are as follows:

December (actual)Birr 280,000

Budgeted sales of 2005:

January 400,000

February600,000

March 300,000

April200,000

c. Sales are 20% for the cash and 80% on credit. All payments on credit sales are collected in the month following sale. The account receivable at December 31, 2004 are a result of December credit sales.

d. The company's gross profit rate is 40% of sales

e. Monthly expenses are budgeted as follows:

salaries and wagesBirr 27,000 per month

AdvertisingBirr 70,000 per month

Shipping5 % of sales

DepreciationBirr 14,000 per month

Other expenses3 % of sales

Note that cash expenses are paid as incurred.

(f) At the end of each month, inventory is to be on hand (minimum required or desired inventory level) equal to 25% of the following month's sales needs, stated at cost.

(g) One-half of a month's inventory purchases are paid for in the month of purchase, the other half is paid for in the following month.

(h) During February, the company will purchase a new copy machine for Birr 1,700 cash. During March, other equipment will be purchased for cash at a cost of Birr 84,500.

(i) During January, the company will declare and pay Birr 45,000 in cash dividends.

(j) The company must maintain a minimum cash balance of Birr 30,000 each month. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month. Borrowings and repayments of principal must be in multiples of Birr 1,000. Interest is paid only at the time of payment of principal. The annual interest rate is 12%.

Required:

Show all the necessary steps carefully

Prepare

A. Budgeted Income statement

B. Budgeted balance sheet