The Getaway Gift Company operates a chain of small gift shops that are located in prime vacation towns. Getaway is considering opening a new store on January 1, 2007. Getaway’s president recently attended a business seminar that explained how formal budgets could be useful in judging the new store’s likelihood of succeeding. Assume you are the company’s accountant. The president has asked you to explain the budgeting process and to provide sample reports that show the new store’s operating expectations for the first three months (January, February, and March). Respond to the following specific requirements:

Required:

a. List the operating budgets and schedules included in a master budget.

b. Explain the difference between pro forma financial statements and the financial statements presented in a company’s annual reports to shareholders.

c. Prepare a sample sales budget and a schedule of expected cash receipts using the following assumptions. Getaway estimates January sales will be $400,000 of which $100,000 will be cash and $300,000 will be credit. The ratio of cash sales to sales on account is expected to remain constant over the three-month period. The company expects sales to increase 10 percent per month. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Use this information to determine the amount of accounts receivable that Getaway would report on the March 31 pro forma balance sheet and the amount of sales it would report on the first quarter pro forma income statement.

d. Prepare a sample inventory purchases budget using the following assumptions. Cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 25 percent of the following month’s cost of goods sold. Getaway makes all inventory purchases on account. The company pays 70 percent of accounts payable in the month of purchase. It pays the remaining 30 percent in the following month. Prepare a schedule of expected cash payments for inventory purchases. Use this information to determine the amount of cost of goods sold Getaway would report on the first quarter pro forma income statement and the amounts of ending inventory and accounts payable it would report on the March 31 pro forma balance sheet.