This is a merchandising company specializing in upscale frames. The company wants to open more stores and has an interested investor who will purchase stock from the company to enable them to expand. The potential investors have requested a detailed budget for the quarter ending June 30 (see Instructions for the 8 budgets). You have been assigned to the planning and budget team whose responsibility it is to prepare the Company Budget to provide to the Investor.

Budgeted Balance Sheet as of March 31, 20XX

            Cash                                                                $ 23,000                     

            Accounts Receivable                                         10,500         

            Inventory                                                           12,000

            Prepaid Insurance                                              1,800

            Fixed Assets, net of depreciation                   65,000

            Accounts Payable, purchases                         12,500

            Payroll Payable                                                    1,500

            Dividends Payable                                               1,875

            Common Stock, no par                                    60,000

            Retained Earnings                                            36,425

The following has been compiled from historic financial reports:

a. April sales are budgeted to be $30,000 and are budgeted to increase 5% over the last month’s sales each month.

b. Collections are 80% in the month of sale and 20% in the month following the sale.

c. Picture This wants to maintain inventory of $9,000 plus 25% of the CGS budgeted for the following month.

d. CGS is equal to 60% of sales revenue.

e. Purchases are paid 50% in the month of purchase and 50% in the following month.

f. Other monthly expenses are as follows:

Rent expense                $3,000

Salary expense                5,000 (75% paid in month, 25% next month)

Depreciation expense       600

Insurance expense            150

Income tax                          20% of Operating Income (paid at end of quarter)

g. Dividends of $1,875 are declared quarterly and paid the following month.

h. The company must maintain a minimum cash balance of $20,000. At 12% interest, an open line of credit is available at a local bank. If funds are needed, they must be borrowed at the beginning of the month in which they will be needed. If there are excess funds at the end of the month, the company will pay all or part of the loan on a FIFO basis plus interest due on the amount of principal being repaid. All borrowing and principle repayments must be in multiples of $1,000.

i.  The company has planned to purchase a vacant lot costing $15,000 in May.

REQUIRED:

1. The budget in detail. That is all the applicable budget reports that respond to the problem requirements. Use the formats shown in Chapter 22 of the text as your general guideline.

        Sales Budget                                                   Cash Receipts Budget

        Purchases Budget                                           Cash Payments Budget

        Operating Expenses Budget                          Cash Budget

        Budgeted I/S                                                     Budgeted B/S

2. Horizontal and Vertical analysis on the Balance Sheet and Income Statement portions of the budget, to the extent you can with the data given.

3. Contribution Margin and Break/Even computations based on your assumptions as to the variable and fixed costs.

4. A list of two or three potential problems you see in your specific budget situation, and suggestions as to how you would solve those problems. Be specific and brief here.

5. The impact of a 20% increase in the number of units sold. That is a flexible budget that shows what would happen to the Income Statement, Balance Sheet, Cash Budget, and Break-Even.