Budget Assignment
Kline Sisters Company operates a gift shop where peak sales and activity occur in the months of December and January. Data regarding the store's operations follow:
# Sales are budgeted at $360,000 for January, 320,000 for February, and $250,000 for March and $240,000 in April.
# Collections are expected to be 30% in the month of sale, 65% in the month following the sale, 3% in the second month following sale and 2% uncollectible.
# The cost of goods sold is 76% of sales.
# The company desires ending merchandise inventory to equal 13% of the following month's cost of goods sold. Payment for merchandise is made 50% in the month of purchase and 50% in the month following the purchase.
# Monthly operating expenses to be paid in cash are $12,000.
# Equipment purchases of $40,000 in February and $30,000 in March were paid in cash.
# Monthly depreciation is $15,000.
# Dividends of $40,000 were declared and paid in January.
# Any borrowings must be in $1,000 increments at 12% annual interest. Assume interest accrues at the beginning of the month and is paid at the end of the month.
# The company must maintain a minimum cash balance of $30,000.
# Ignore income taxes.
# All accounts receivable from December 31 will be collected in January and all accounts payable at December 31 will be paid in January.
# The balance sheet as of December 31st:
| Kline Sisters Company |
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| Balance Sheet |
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| 12/31/2014 |
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| Assets: |
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| Cash |
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$22,000 |
| Net Accounts Receivable |
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$83,000 |
| Merchandise Inventory |
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$36,000 |
| Property Plant and Equipment |
$1,600,000 |
|
| Less: accumulated depreciation |
$588,000 |
$1,012,000 |
| Total Assets |
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$1,153,000 |
| |
|
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| Liabilities & Stockholder's Equity |
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| Accounts Payable |
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$190,000 |
| Common Stock |
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$350,000 |
| Retained Earnings |
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$613,000 |
| Total liabilities and stockholder's equity |
|
$1,153,000 |
Prepare the following budgets for each month January, February, March and Total for the quarter in good form in excel with proper use of formulas and formatting:
a. Prepare a Schedule of Expected Cash Collections
# What is the budgeted accounts receivable at March 31st ?
b. Prepare a Merchandise Purchases Budget and a Schedule of Expected Cash Disbursements
# What is the budgeted accounts payable at March 31st ?
c. Prepare a Cash Budget
# How much does the company need to borrow for the quarter?
# How much can the company repay for the quarter?
d. Prepare a Budgeted Income Statement
Prepare a Budgeted Balance Sheet - it must balance!
Prepare a letter to the CEO identifying three items of interest on the budget and provide recommendations
Check figures:
cash collections at end of quarter = $814,800
Deficiency in cash at the end of the quarter = $(99,206)
You will need to borrow and repay during the quarter.
(Note that due to varying assumptions made in the budgeting process, your numbers may be slightly different than mine. If your balance sheet balances, then your budget works.)