The Grady Tire Company manufactures racing tires for bicycles. Grady sells tires for $60 each. Grady is planning for the next year by developing a master budget by quarters. Grady€™s balance sheet for December 31, 2016, follows:

Other data for Grady Tire Company:
a. Budgeted sales are 700 tires for the first quarter and expected to increase by 50 tires per quarter. Cash sales are expected to be 30% of total sales, with the remaining 70% of sales on account.
b. Finished Goods Inventory on December 31 consists of 100 tires at $26 each.
c. Desired ending Finished Goods Inventory is 20% of the next quarter€™s sales; first quarter sales for 2018 are expected to be 900 tires. FIFO inventory costing method is used.
d. Direct materials cost is $9 per tire.
e. Desired ending Raw Materials Inventory is 20% of the next quarter€™s direct materials needed for production; desired ending inventory for December 31 is $900; indirect materials are insignificant and not considered for budgeting purposes.
f. Each tire requires 0.4 hours of direct labor; direct labor costs average $10 per hour.
g. Variable manufacturing overhead is $4 per tire.
h. Fixed manufacturing overhead includes $3,000 per quarter in depreciation and $1,770 per quarter for other costs, such as utilities, insurance, and property taxes.
i. Fixed selling and administrative expenses include $7,500 per quarter for salaries; $3,000 per quarter for rent; $1,650 per quarter for insurance; and $2,000 per quarter for depreciation.
j. Variable selling and administrative expenses include supplies at 2% of sales.
k. Capital expenditures include $50,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
l. Cash receipts for sales on account are 30% in the quarter of the sale and 70% in the quarter following the sale; December 31, 2016, Accounts Receivable is received in the first quarter of 2017; uncollectible accounts are considered insignificant and not considered for budgeting purposes.
m. Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter; December 31, 2016, Accounts Payable is paid in the first quarter of 2017.
n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
o. Income tax expense is projected at $4,000 per quarter and is paid in the quarter incurred.
p. Grady desires to maintain a minimum cash balance of $50,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 8% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
Requirements
1. Prepare Grady€™s operating budget and cash budget for 2017 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.
2. Prepare Grady€™s annual financial budget for 2017, including budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows.

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GRADY TIRE COMPANY Balance Sheet December 31, 2016 Assets Current Assets: Cash Accounts Receivable Raw Materials Inventory Finished Goods Inventory Total Current Assets 55,000 45,000 900 2,600 103,500 Property, Plant, and Equipment: Equipment Less: Accumulated Depreciation 155,000 (77,000) 78,000 181,500 Total Assets Liabilities Current Liabilities: Accounts Payable $6,000 Stockholders' Equity Common Stack, no par Retained Earnings $ 110,000 65,500 Total Stockholders' Equity Total Liabilities and Stockholders Equity 175,500 181,500