Question:
(Cash budget) Blackman Corp., a rapidly expanding crossbow distributor, is in the process of formulating plans for 2011. Cara Jordan, director of marketing, has completed her 2011 forecast and is confident that sales estimates will be met or exceeded. The following forecasted sales figures show the growth expected and will provide the planning basis for other corporate departments.
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SALES
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SALES
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January
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$3,600,000
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July
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$6,000,000
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February
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4,000,000
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August
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6,000,000
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|
March
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3,600,000
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September
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6,400,000
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April
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4,400,000
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October
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6,400,000
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May
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5,000,000
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November
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6,000,000
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June
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5,600,000
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December
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6,800,000
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George Moore, assistant controller, has been given the responsibility for formulating the cash flow projection, a critical element during a period of rapid expansion. The following information will be used in preparing the cash analysis:
- Blackman has experienced an excellent record in accounts receivable collections and expects this trend to continue. The company collects 60 percent of its billings in the month after the sale and 40 percent in the second month after the sale. Uncollectible accounts are insignificant and should not be considered in the analysis.
- The purchase of crossbows is Blackman's largest expenditure; the cost of these items equals 50 percent of sales. The company receives 60 percent of the crossbows one month prior to sale and 40 percent during the month of sale.
- Prior experience shows that 80 percent of accounts payable is paid by Blackman one month after receipt of the purchased crossbows, and the remaining 20 percent is paid the second month after receipt.
- Hourly wages, including fringe benefits, are a function of sales volume and are equal to 20 percent of the current month's sales. These wages are paid in the month incurred.
- Administrative expenses are projected to be $5,280,000 for 2011. All of these expenses are incurred uniformly throughout the year except the property taxes. Property taxes are paid in four equal installments in the last month of each quarter. The composition of the expenses is:
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Salaries
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$ 960,000
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Promotion
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1,320,000
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|
Property taxes
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480,000
|
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Insurance
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720,000
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Utilities
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600,000
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Depreciation
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1,200,000
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Total
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$5,280,000
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- Income tax payments are made by Blackman in the first month of each quarter based on income for the prior quarter. Blackman's income tax rate is 40 percent. Blackman's net income for the first quarter of 2011 is projected to be $1,224,000.
- Blackman has a corporate policy of maintaining an end-of-month cash balance of $200,000. Cash is invested or borrowed monthly, as necessary, to maintain this balance.
- Blackman uses a calendar year reporting period.
a. Prepare a budgeted schedule of cash receipts and disbursements for Blackman Corp., by month, for the second quarter of 2011. Ignore interest expense and/or interest income associated with the borrowing/investing activities.
b. Discuss why cash budgeting is particularly important for a rapidly expanding company such as Blackman Corp.
c. Do monthly cash budgets ignore the pattern of cash flows within the month? Explain.