Quantum Graphics makes custom T-shirts and other promotional products for student organizations and businesses. It plans to open a new location in Austin, Texas. It has secured a corporate contract with Dell Computer Corporation that will generate $5,500 per month in sales. With the new contract and potential student organizations from colleges in San Marcos to Georgetown, it needs to plan for its first quarter of operations.

Quantum Graphics expects cash sales from student organizations to be $2,750, $2,500, and $1,000 for Month 1, Month 2, and Month 3, respectively. Its corporate sales are always made on account. Based on previous history, Quantum Graphics expects to collect 100% of its corporate sales in the following month of the original sale (e.g. Month 1 account sales are collected in Month 2, Month 2 account sales are collected in Month 3, etc.).

Quantum Graphics cost of goods sold is projected to be 40% of all sales. Its selling, general and administrative expenses are 16% of all sales (Donations 10% + Advertising 5% + Miscellaneous 1% = 16%). It does not keep any inventory on hand and pays its accounts payable balances in full in the following month of purchase. Quantum Graphics' owner invested $1,500 in this venture. The $1,500 will be used to prepay the first three months of rent. Quantum Graphics signed a three month lease because it is in negotiations to purchase a rundown building for $3,000 located just south of Austin. It believes it will be able to buy the building at the asking price and will need to make a cash payment in Month 3 for the building.

If Quantum Graphics is short of cash, it has access to a line of credit with an interest rate of 10%. The total line of credit is $5,000. It will borrow the money at the beginning of the month to avoid a cash shortage. Quantum Graphics will only repay the loan when it has enough cash to pay the full balance and maintain an adequate ending cash balance. All loans that are repaid are repaid on the last day of the month. Quantum Graphics must always maintain an ending cash balance of at least $300.

An owners draw of $2,000 is made every month. (Note: sole proprietors and partnerships take owners draws, stockholders receive dividends).

Based upon the information provided, complete the operations budget and answer the questions in Connect. When making calculations always round up (i.e. 33 7% = 2.31, round up to 3.00). You may also assume that there are 30 days in each month of the first quarter.

1. What is the total projected sales for the first quarter of operations?

a - $16,500

b - $6,250

c - $17,250

d - $22,750

2. How much cash does Quantum Graphics expect to collect in the first quarter of operations?

$11,000

$6,250

$22,750

$17,250

3. What is the projected payments for purchases in the first quarter of operations?

$2,600

$9,100

$6,500

$5,800

4. What is the total projected Cost of Goods Sold for the first quarter of operations?

$9,100

$2,600

$6,500

$3,300

5. What is the total projected SG&A expense?

$5,140

$2,320

$3,640

$2,820

6. What is the total projected cash payments for SG&A expense?

$2,820

$3,640

$5,140

$2,320

7. Why do we recognized $1,500 in section 2 of Month 1 and not $500 per month for the rent expense when creating the Selling, General & Administrative Expense budget?

a - When creating a master budget, we do not use GAAP for Section 2. We use cash accounting.

b - The rent expense should be recognized in the budget at $500 per month.

c - All SG&A expenses are recognized this way.

d - None of the above are true.

8. What is the projected beginning cash balance for Month 1?

$1,500

$4,250

$2,750

$300

9. What is the projected ending cash balance for Month 1?

$300

$870

($570)

None of the above.

10. If Quantum Graphics borrowed money in Month 1, what is the projected interest Quantum Graphics will have to pay for borrowing the money?

$570

$7

$870

Quantum Graphics will not have interest because it does not need to borrow money in Month 1.

$15

11. If Quantum Graphics has a projected cash surplus in Month 2, how much cash will it repay for borrowing on its line of credit?

$570

$885

$877

$870

Quantum Graphics will not have a cash surplus, therefore it will need to borrow more money in Month 2.

12. If Quantum Graphics is projected to have a cash shortage in Month 3, how much is the shortage?

$1,181

$1,905

Quantum Graphics will not have a projected cash shortage in Month 3.

$2,205

13. If Quantum Graphics has a projected cash shortage for Month 3, how much will it need to borrow?

$300

$1,905

$2,205

Quantum Graphics will not have a projected cash shortage in Month 3.

14. What is the projected gross profit for the first quarter of operations?

$13,650

$8,485

$9,100

$22,750

15. What is the projected interest expense for the first quarter of operations?

$0

$26

$228

$34

16. What is the projected net income the first quarter of operations?

$22,750

$8,476

$8,485

$13,650

17. What is the projected beginning capital investment for the first quarter of operations?

$1,500

Cannot be determined

$3,985

$0

18. What is the projected total owner's equity for the first quarter of operations?

$1,500

$6,000

$3,976

$8,476

19. What is the projected ending cash balance for the first quarter of operations?

$2,197

$300

$0

$1,897

20. What is the projected accounts receivables balance for the first quarter of operations?

$5,500

$22,750

$16,500

$6,250

21. What is the projected accounts payable for the first quarter of operations?

$5,165

$9,100

$2,600

$3,200

22. What is the projected interest payable for the first quarter of operations?

$34

$7

$25

$19

23. What is the projected net cash flow from operating activities for the first quarter of operations?

$0

$5,595

$17,250

$300

24. What is the projected net cash flow for investing activities for the first quarter of operations?

$1,500

$3,000

$6,000

($3,000)

25. What is the projected cash flow from financing activities for the first quarter of operations?

$3,075

($3,795)

$870

$1,500

($6,000)

$2,205