Rainbow Company Master Budget Practice Problem 1. Rainbow Company expects its Sales in January to be $120,000 and expects Sales to grow by 10% each month. 2. 20% of sales are cash sales, the remaining 80% are credit sales. Rainbow collects 60% of all sales in the month of the sale, the remaining 40% in the month after the sale. 3. The cost of goods sold is equal to 60% of sales. 4. Rainbow Company likes to keep an ending inventory equal to 20% of next months cost of goods sold on hand. 5. All purchases of inventory are on account, and the company pays for 75% of all purchases in the month of the purchase, 25% in the month after the purchase. 6. The company pays its sales force a commission equal to 6% of sales. 7. The company also believes that its supplies expense is equal to $5,000 plus 1% of sales. 8. Salaries is $4,000 per month, Advertising is $3,000 per month, Depreciation is $3,000 per month, and Utilities are $2,500 per month. 9. The company pays its rent at the beginning of each quarter and covers the three months in the quarter. The payment of the first quarter was made on January 1st for $15,000. 10. The company purchased an insurance policy covering 24 months for $24,000 on October 1st of the previous year. 11. All selling and administrative expenses are paid in the month they are incurred except for commissions that are paid in the month after they are earned and the rent and the insurance which are paid in advance. 12. On January 31, Rainbow Company purchased Land costing $38,000. Rainbow paid cash for the land. 13. Interest on long-term debt is equal to 1% of the beginning balance and is paid each month. The company must maintain a minimum balance in cash of $10,000 and will use any cash surplus to pay down long-term debt. The company borrows cash in $1,000 increments. 14. The company is subject to a 25% income tax rate. The company pays income taxes in the month after they are accrued (expensed). 15. In January, the company will declare a $2,500 dividend that it will pay in February. 16. The company had a beginning balance sheet (as of January 1) as follows: Prepare for January and February: 1. Sales budget 2. Purchases budget 3. Selling \& Admin Expense budget 4. Cash Budget 5. Budget/Proforma Income Statement 6. Budget/Proforma Balance Sheet