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You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and, at certain times of the year, has experienced a shortage of cash. Because you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.
The company sells many styles of earrings, but all are sold for the same price$ per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow in pairs of earrings:
January actual June budget
February actual July budget
March actual August budget
April budget September budget
May budget
The concentration of sales before and during May is due to Mothers Day. Sufficient inventory should be on hand at the end of each month to supply of the earrings sold in the following month.
Suppliers are paid $ for a pair of earrings. Onehalf of a months purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only of a months sales are collected in the month of sale. An additional are collected in the following month, and the remaining are collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions of sales
Fixed:
Advertising $
Rent $
Salaries $
Utilities $
Insurance $
Depreciation $
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $ in new equipment during May and $ in new equipment during June; both purchases will be for cash. The company declares dividends of $ each quarter, payable in the first month of the following quarter.
The companys balance sheet as of March is given below:
Assets
Cash $
Accounts receivable $ February sales; $ March sales
Inventory
Prepaid insurance
Property and equipment net
Total assets $
Liabilities and Stockholders Equity
Accounts payable $
Dividends payable
Common stock
Retained earnings
Total liabilities and stockholders equity $
The company maintains a minimum cash balance of $ All borrowing is done at the beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of $ at the beginning of each month. The interest rate on these loans is per month, and for simplicity, we will assume interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible in increments of $ while still retaining at least $ in cash.
Prepare a master budget for the threemonth period ending June that includes a cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $
Note: Cash deficiency, repayments and interest should be indicated by a minus sign.
Earrings Unlimited
Cash Budget
For the Three Months Ending June
April May June Quarter
Beginning cash balance
Add collections from customers
Total cash available
Less cash disbursements:
Merchandise purchases
Advertising
Rent
Salaries
Commissions
Utilities
Equipment purchases
Dividends paid
Total cash disbursements
Excess deficiency of cash available over disbursements
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash balance $ $ $ $
Prepare a master budget for the threemonth period ending June that includes a budgeted income statement for the threemonth period ending June Use the contribution approach.
Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June
Variable expenses:
Fixed expenses:
Prepare a master budget for the threemonth period ending June that includes a budgeted balance sheet as of June
Earrings Unlimited
Budgeted Balance Sheet
June
Assets
Total assets $
Liabilities and Stockholders Equity
Total liabilities and stockholders equity $
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