Budgeted Cash Disbursements for Merchandise Purchases Asked Jun 4, 2011, 12:14 PM 65 Answers You have been hired

d as a new management trainees 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 experience a shortage of cash. Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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-$10.00 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six month follow (in pairs of earrings): January (actual) 20,000 Febuary (actual) 26,000 March (actual) 40,000 April (budget) 65,000 May (budget) 100,000 June (budget) 50,000 July (budget) 30,000 August (budget) 28,000 September (budget) 25,000 The concentration of sales before and during May is due to Mother''s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Suppliers are paid $4.00 for a pair of earrings. One-half of a month''s purchases in paid for in the month of the purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20 percent of a month''s sales are collected in the month of sale. An additional 70 percent is collected in the following month, and the remaining 10 percent in the second month following sale. Bad debts have been negligible.

Monthly operation expenses for the company are given below: Variable: Sales Commission 4% of sales Fixed: Advertising 200,000 Rent 18,000 Salaries 106,000 Utilities 7,000 Insurance 3,000 Depreciation 14,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase 16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter payable in the first month of the following quarter. A listing of the company''s ledger accounts as of March 3 is given below: Assets Cash 74,000 Accounts receivalbe ($26,000 febuary sales;$320,00 March sale 346,000 Inventory 104,000 Prepaid Insurance 21,000 Property and equipment (net) 950,000 Total Assets 1,495,000 Liabilities and Stockholders Equity Accounts payable 100,000 Dividends payable 15,000 Capital stock 800,000 Retained earnings 580,000 Total liabilities and Stockholders Equity 1,495,000 The company maintains a minimum cash balance of 50,000. All borrowing is done at the beginning of a

month, and repayments are made at the end of a month. The annual interest rate is 12 percent. Interest is computed and paid at the end of each quarter on all loans outstanding during the quarter.

Required; Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets; 1. A. A sales budget, by month and in total B. A schedule of expected cash collections from sales, by month and in total C. A merchandise purchaser budget in units and in dollars. Show the budget by month and in total. D. A schedule of expected cash disbursements for merchandise purchases, by month and in total. 2. A cash budget. Show the budget by the month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000 3. A budgeted income statement for the three months period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30. I am stuck here and can't figure out how to come to the answers for this. Please provide some help asap. Found out about this assignment late and am behind the gun. Have about 24 hours to complete. Any help would be appreciated.

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65 Answers #2 Just Looking Posts: 1,610, Reputation: 2419 Ultra Member Jun 4, 2011, 12:23 PM Please read this announcement. Announcement: If you'll just start by doing the #1 requirements, you can build from there. I think maybe you just need a little confidence. This is a comprehensive assignment. Start with 1a. You'll have a fairly simple schedule by month of units and dollars. Remember they are only looking for the 3 months of the second quarter. Part b will use this info: The company has found, however, that only 20 percent of a month's sales are collected in the month of sale. An additional 70 percent is collected in the following month, and the remaining 10 percent in the second month following sale. Part c and d - read the exercise as to inventory needs and how suppliers are paid. Do what you can and post it. We'll check it to see that you are on the right track. Helpful Reply

#3 Will2412 Posts: 37, Reputation: 15 Junior Member Jun 4, 2011, 12:37 PM SALES BUDGET: April May June Quarter Budgeted unit sales 65,000 100,000 50,000 215,000 Selling price per unit 10 10 10 10

Total Sales 650,000 1,000,000 500,000 2,150,000

SCHEDULE OF EXPECTED CASH COLLECTIONS: April May June Quarter February sales 26000 2,600 2,600 March sales 40000 28,000 400,000 428,000 April sales 65000 13,000 45,500 6,500 65,000 May sales 100000 20,000 70,000 90,000 June sales 50000 10,000 10,000 Total Cash Collections 43,600 465,500 86,500 595,600

MERCHANDISE PURCHASES BUDGET: April May June Quarter Budgeted unit sales 65,000 100,000 50,000 215,000 Add desired ending inventory 40,000 20,000 12,000 12,000 Total needs 105,000 120,000 62,000 227,000 Less beginning inventory 16,000 40,000 20,000 16,000 Required purchases 89,000 80,000 42,000 211,000 Cost of purchases @ $4 per unit 356,000 320,000 168,000 844,000

BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES: April May June Quarter Accounts payable April purchases May purchases June purchases Total cash payments

EARRINGS UNLIMITED CASH BUDGET FOR THE THREE MONTHS ENDING JUNE 30 April May June Quarter Cash balance 50,000 50,000 50,000 50,000 Add collections from customers 43,600 465,500 86,500 595,600 Total cash available 93,600 515,500 136,500 745,600 Less Disbursements

Merchandise purchases Advertising 200,000 200,000 200,000 200,000 Rent 18,000 18,000 18,000 18,000 Salaries 106,000 106,000 106,000 106,000 Commissions 2,600 4,000 2,000 8,600 Utilities 7,000 7,000 7,000 7,000 Equipment purchases 16,000 40,000 Dividends paid 15,000 Total Disbursements 348,600 351,000 373,000 339,600 Excess (deficiency) of receipts over disbursements Financing: Borrowings Repayments Interest Total financing Cash balance, ending

EARRINGS UNLIMITED BUDGETED INCOME STATEMENT FOR THE THREE MONTHS ENDED JUNE 30 Sales Variable expenses: Cost of goods sold Commissions - Contribution Margin Fixed expenses: Advertising Rent Salaries Utilities Insurance Depreciation - Net operating income Interest expense Net income -

EARRINGS UNLIMITED BUDGETED BALANCE SHEET JUNE 30 Assets: Cash Accounts receivable (see below) Inventory Prepaid insurance Property and equipment, net Total assets

Liabilities and Stockholders' Equity Accounts payable, purchases Dividends payable Capital stock Retained earnings (see below) Total liabilities and stockholders' equity

Accounts receivable at June 30: May sales x ?% June sales x ?% Total

Retained earnings at June 30: Balance, March 31 Add net income Total Less dividends declared Balance, June 30 Helpful Reply

#4 Just Looking Posts: 1,610, Reputation: 2419 Ultra Member Jun 4, 2011, 01:18 PM Sales Budget is right. Collections The way I'd show the cash collections budget is: April collections.2*650,000 = 130,000 .7*400,000 = 280,000 (from March sales) .1*260,000 = 26,000 (from Feb sales) Total budgeted cash collections for April = 436,000 I'll let you recompute May and June. Purchases You are on the right track. The ending inventory at March 31 is $104,000 (65,000 units budgeted for April x $4 per unit x .4) For April, you need to buy the remaining 60% and 40% of the needs for May. It looks like you just have the "less beginning inventory" number wrong. I didn't check May and June. Once you understand April, you can check and see if they are right.

Budgeted cash disbursements Are you having problems with this one? There are no answers. It is similar to the cash collections computations except "One-half of a month's purchases in paid for in the month of the purchase; the other half is paid for in the following month." I stopped here. If you can make your corrections and then see if you need any changes beyond that, I'll check back later to look at it. Thanks. Helpful Reply

#5 Will2412 Posts: 37, Reputation: 15 Junior Member Jun 4, 2011, 03:21 PM Comment on Just Looking's post Quote: Originally Posted by Just Looking Sales Budget is right. Collections The way I'd show the cash collections budget is: April collections.2*650,000 = 130,000 .7*400,000 = 280,000 (from March sales) .1*260,000 = 26,000 (from Feb sales) Total budgeted cash collections for April = 436,000 I'll let you recompute May and June. Purchases You are on the right track. The ending inventory at March 31 is $104,000 (65,000 units budgeted for April x $4 per unit x .4) For April, you need to buy the remaining 60% and 40% of the needs for May. It looks like you just have the "less beginning inventory" number wrong. I didn't check May and June. Once you understand April, you can check and see if they are right.

Budgeted cash disbursements Are you having problems with this one? There are no answers. It is similar to the cash collections computations except "One-half of a month's purchases in paid for in the month of the purchase; the other half is paid for in the following month." I stopped here. If you can make your corrections and then see if you need any changes beyond that, I'll check back later to look at it. Thanks. Ok Just Looking I have that under control for purchases. Yes I am having trouble with the budgeted Cash dibursements and the cash budget for 3 months. I have filled in what i could please help me in figuring out what is wrong and what I need to do. Thanks. Reposting my solutions thus far in a new

thread question Helpful Reply

#6 Will2412 Posts: 37, Reputation: 15 Junior Member Jun 4, 2011, 03:24 PM Repost to Budgeted Cash Disbursements You have been hired as new management trainees 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 experience a shortage of cash. Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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-$10.00 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six month follow (in pairs of earrings): January (actual) 20,000 February (actual) 26,000 March (actual) 40,000 April (budget) 65,000 May (budget) 100,000 June (budget) 50,000 July (budget) 30,000 August (budget) 28,000 September (budget) 25,000 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 40% of the earrings sold in the following month. Suppliers are paid $4.00 for a pair of earrings. One-half of a month's purchases in paid for in the month of the purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20 percent of a month's sales are collected in the month of sale. An additional 70 percent is collected in the following

month, and the remaining 10 percent in the second month following sale. Bad debts have been negligible. Monthly operation expenses for the company are given below: Variable: Sales Commission 4% of sales Fixed: Advertising 200,000 Rent 18,000 Salaries 106,000 Utilities 7,000 Insurance 3,000 Depreciation 14,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase 16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter payable in the first month of the following quarter. A listing of the company's ledger accounts as of March 3 is given below: Assets Cash 74,000 Accounts receivable ($26,000 February sales;$320,00 March sale 346,000 Inventory 104,000 Prepaid Insurance 21,000 Property and equipment (net) 950,000 Total Assets 1,495,000 Liabilities and Stockholders Equity Accounts payable 100,000 Dividends payable 15,000 Capital stock 800,000 Retained earnings 580,000 Total liabilities and Stockholder's Equity 1,495,000 The company maintains a minimum cash balance of 50,000. All borrowing is done at the beginning of a month, and repayments are made at the end of a month. The annual interest rate is 12 percent.

Interest is computed and paid at the end of each quarter on all loans outstanding during the quarter.

Required; Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets; 1. A. A sales budget, by month and in total B. A schedule of expected cash collections from sales, by month and in total C. A merchandise purchaser budget in units and in dollars. Show the budget by month and in total. D. A schedule of expected cash disbursements for merchandise purchases, by month and in total. 2. A cash budget. Show the budget by the month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000 3. A budgeted income statement for the three months period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30. Student Name:

SALES BUDGET: April May June Quarter Budgeted unit sales 65,000 100,000 50,000 215,000 Selling price per unit 10 10 10 10 Total Sales 650,000 1,000,000 500,000 2,150,000

SCHEDULE OF EXPECTED CASH COLLECTIONS: April May June Quarter February sales 26,000 26,000 March sales 40000 280,000 40,000 320,000 April sales 65000 130,000 455,000 65,000 650,000 May sales 100000 200,000 700,000 900,000 June sales 50000 100,000 100,000 Total Cash Collections 436,000 695,000 865,000 1,996,000

MERCHANDISE PURCHASES BUDGET:

April May June Quarter Budgeted unit sales 65,000 100,000 50,000 215,000 Add desired ending inventory 40,000 20,000 12,000 12,000 Total needs 105,000 120,000 62,000 227,000 Less beginning inventory 16,000 40,000 20,000 16,000 Required purchases 89,000 80,000 42,000 211,000 Cost of purchases @ $4 per unit $ 356,000.00 $ 320,000.00 $ 168,000.00 $ 844,000.00

BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES: April May June Quarter Accounts payable 80,000 80,000 April purchases 178,000 178,000 356,000 May purchases 160,000 160,000 320,000 June purchases 84,000 84,000 Total cash payments 258,000 338,000 244,000 436,000

EARRINGS UNLIMITED CASH BUDGET FOR THE THREE MONTHS ENDING JUNE 30 April May June Quarter Cash balance 50,000 50,000 50,000 50,000 Add collections from customers 43,600 465,500 86,500 595,600 Total cash available 93,600 515,500 136,500 745,600 Less Disbursements Merchandise purchases 258,000 Advertising 200,000 200,000 200,000 200,000 Rent 18,000 18,000 18,000 18,000 Salaries 106,000 106,000 106,000 106,000 Commissions 2,600 4,000 2,000 8,600 Utilities 7,000 7,000 7,000 7,000 Equipment purchases 16,000 40,000 Dividends paid 15,000 Total Disbursements 348,600 351,000 373,000 339,600 Excess (deficiency) of receipts over disbursements Financing: Borrowings

Repayments Interest Total financing Cash balance, ending

EARRINGS UNLIMITED BUDGETED INCOME STATEMENT FOR THE THREE MONTHS ENDED JUNE 30 Sales Variable expenses: Cost of goods sold Commissions - Contribution Margin Fixed expenses: Advertising Rent Salaries Utilities Insurance Depreciation - Net operating income Interest expense Net income -

EARRINGS UNLIMITED BUDGETED BALANCE SHEET JUNE 30 Assets: Cash Accounts receivable (see below) Inventory Prepaid insurance Property and equipment, net Total assets

Liabilities and Stockholders' Equity Accounts payable, purchases Dividends payable Capital stock Retained earnings (see below) Total liabilities and stockholders' equity

Accounts receivable at June 30: May sales x ?% June sales x ?% Total

Retained earnings at June 30: Balance, March 31 Add net income Total Less dividends declared Balance, June 30 Helpful Reply

#7 Just Looking Posts: 1,610, Reputation: 2419 Ultra Member Jun 4, 2011, 03:57 PM Okay, I'm back now. Give me some time to look at what you did and respond. Just so you know, the moderators prefer that you keep all responses in one thread. Thanks. Helpful

Reply

#8 Just Looking Posts: 1,610, Reputation: 2419 Ultra Member Jun 4, 2011, 04:18 PM Okay, parts 1a and 1b are correct. I don't see where you corrected 1c. For April you should have: Budgeted unit sales...........65,000 Desired ending inventory....40,000 Needs..............................105,000 Less beginning inventory.....26,000 Units to purchased................79,000 Price per unit............................$4 Costs of 79,000 units.......$316,000 I did it the easy way. We know that 40% of April's needs are in inventory. Needed: 60% * 65,000*$4..............156,000 40% * 100,000 * $4..........160,000 Purchases required for April $316,000 Your numbers for May and June are good. Let's start there. I'll look at the cash disbursements next, but I need a little bit of time to do something else. Be back soon. Helpful Reply

#9 Just Looking Posts: 1,610, Reputation: 2419 Ultra Member Jun 4, 2011, 04:43 PM I think you are making the cash disbursements for purchases more complicated than it is. The problem states that 50% are paid the month following purchase and 50% the month of purchase. If we look at April, we have the following: 50% of March purchases.............$100,000 50% of April purchases...............$158,000 Total...............................$258,000 You'll need to also look at May and June. Moving on to Part 2, you'll start with the beginning cash number per your question, add budgeted receipts, subtract budgeted purchases, adjust by the operation expenses and the plans the company has for other purchases and dividends. Helpful Reply

#10 Will2412 Posts: 37, Reputation: 15 Junior Member Jun 4, 2011, 04:46 PM SALES BUDGET: April May June Quarter Budgeted unit sales 65,000 100,000 50,000 215,000 Selling price per unit 10 10 10 10 Total Sales 650,000 1,000,000 500,000 2,150,000

SCHEDULE OF EXPECTED CASH COLLECTIONS: April May June Quarter February sales 26,000 26,000 March sales 280,000 40,000 320,000 April sales 130,000 455,000 65,000 650,000 May sales 200,000 700,000 900,000 June sales 100,000 100,000 Total Cash Collections 436,000 695,000 865,000 1,996,000

MERCHANDISE PURCHASES BUDGET: April May June Quarter Budgeted unit sales 65,000 100,000 50,000 215,000 Add desired ending inventory 40,000 20,000 12,000 12,000 Total needs 105,000 120,000 62,000 227,000 Less beginning inventory 16,000 40,000 20,000 16,000 Required purchases 89,000 80,000 42,000 211,000 Cost of purchases @ $4 per unit $356,000.00 $320,000.00 $168,000.00 $844,000.00

BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES: April May June Quarter Accounts payable $91,200.00 $91,200.00 April purchases $178,000.00 $178,000.00 $356,000.00 May purchases $160,000.00 $160,000.00 $320,000.00 June purchases $84,000.00 $84,000.00 Total cash payments $269,200.00 $338,000.00 $244,000.00 $447,200.00

EARRINGS UNLIMITED CASH BUDGET FOR THE THREE MONTHS ENDING JUNE 30 April May June Quarter Cash balance 74,000 50,000 50,000 50,000 Add collections from customers 436,000 465,500 86,500 595,600 Total cash available 510,000 515,500 136,500 1,162,000 Less Disbursements Merchandise purchases 269,200 Advertising 200,000 200,000 200,000 200,000 Rent 18,000 18,000 18,000 18,000

Salaries 106,000 106,000 106,000 106,000 Commissions 2,600 4,000 2,000 8,600 Utilities 7,000 7,000 7,000 7,000 Equipment purchases 16,000 40,000 Dividends paid 15,000 Total Disbursements 348,600 351,000 373,000 339,600 Excess (deficiency) of receipts over disbursements Financing: Borrowings Repayments Interest Total financing Cash balance, ending