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Posted on Dec 16, 2022

This case study provides practice in preparing an annual budget for a company, including budgeted financial statements. This case is not a group project. Instead,

This case study provides practice in preparing an annual budget for a company, including budgeted financial statements. This case is not a group project. Instead, you are required to complete this case on your own. You must upload your submission to the Canvas website by the due date indicated in the course schedule. If you perform the calculations by hand, upload pages 3-6 of this Word file. If you perform your calculations using the Excel worksheet, upload your Excel file.

Facts

Nomad Vineyards Inc. (Nomad) is a wholesale distributor of imported wine that commenced operations in 20Y1. Ethan is the president of Nomad and has just hired you as a consultant to help him prepare monthly budgets for the upcoming year, 20Y2. For simplicity, prepare monthly budgets for only the first half of the year, January 1 through June 30, 20Y2.

Ethan has made some sales forecasts for 20Y2. He expects monthly sales to start at $400,000 in January and then grow $20,000 per month during the first half of the year, as follows:

Sales revenue, 20Y1		Budgeted sales revenue, 20Y2
October	$330,000	January	$400,000	April	$460,000
November	$355,000	February	$420,000	May	$480,000
December	$380,000	March	$440,000	June	$500,000
				July	$520,000

All inventory sales are made on the account. Nomad collects 20% of its receivables in the month of the sale and 80% in the following month. Uncollectible accounts were negligible in 20Y1 and no bad debts are expected in 20Y2. Nomad’s only cash receipts are from inventory sales.

All merchandise inventory purchases are made on the account. Nomad pays 30% of its payables in the month of the purchase and 70% in the following month. Nomad’s gross profit percentage is 40% and its cost of goods sold percentage is 60%. Nomad maintains an ending inventory balance (safety stock) equal to 50% of the cost of goods sold in the following month. Inventory purchases in December 20Y1 were $234,000.

Nomad’s monthly selling and administrative (S&A) expenses include variable costs equal to 5% of sales revenue and fixed costs of $70,000. The variable S&A expenses are sales commissions, whereas the fixed S&A expenses include rent, advertising, salaries, insurance, and depreciation. All S&A expenses are paid in cash in the month the expense is incurred, except for the monthly depreciation expense of $10,000 and monthly insurance expense of $3,000. Nomad paid its annual insurance premium for 20Y2 of $36,000 on December 31, 20Y1.

Ethan has established a capital expenditure budget for 20Y1. The plan is to acquire $75,000 of new property, plant and equipment (PP&E) at the start of each quarter, including January 20Y2 and April 20Y2. Nomad pays dividends semi-annually in January and July. In December 20Y1, Nomad declared a $50,000 dividend which is payable in January 20Y2. Nomad’s accountant estimates that its income tax liability for 20Y2 will be $260,000 (tax rate of roughly 25%). Consequently, Nomad will make four quarterly estimated income tax payments of $65,000 each on April 15, June 15, September 15 and December 15 of 20Y2.

Nomad’s balance sheet on December 31, 20Y1 is as follows:

Assets
Cash	$ 124,000
Accounts receivable [a]	304,000
Inventory	120,000
Prepaid insurance	36,000
PP&E, net of accumulated depreciation	796,000
Total assets	$1,380,000

Liabilities and Stockholders’ Equity
Accounts payable [b]	$ 163,800
Dividends payable	50,000
Common stock	1,000,000
Retained earnings	166,200
Total liabilities & stockholders’ equity	$1,380,000