SMG AC 222 Lecture Notes - Lecture 8: Accrual, Operating Expense, Income Statement
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In this assignment you are goingto prepare elements of the master budget for Hancock Company usingthe following information. You should prepare individually theanswers to the following. You should have a cover page and typeyour answers in excel or word.
Hancock Company, a merchandisingcompany, prepares its master budget on a quarterly basis. Thefollowing data have been assembled to assist in preparation of themaster budget for the second quarter.
a. As of December 31(the end of the prior quarter), the companyâs balance sheet showedthe following account balances:
Cash | $ 6,700 | |||
Accounts receivable | 36,900 | |||
Inventory | 11,130 | |||
Buildings and equipment (net) | 120,000 | |||
Accounts payable | $ 32,880 | |||
Common stock | 100,000 | |||
Retained earnings |
| 41,850 | ||
$174,730 | $174,730 | |||
b. Actual andbudgeted sales are as follows:
December (actual) | $61,500 |
January | $79,500 |
February | $88,800 |
March | $89,400 |
April | $58,100 |
c. Sales are 40% forcash and 60% on credit. All payments on credit sales are collectedin the month following the sale. The accounts receivable atDecember 31 are a result of December credit sales.
d. The companyâs grossmargin percentage is 30% of sales. (In other words, cost of goodssold is 70% of sales.)
e. Each monthâs endinginventory should equal 20% of the following month's budgeted costof goods sold.
f. One-quarter of a monthâsinventory purchases is paid for in the month of purchase; the otherthree-quarters are paid for in the following month. The accountspayable at December 31 are the result of December purchases ofinventory.
g. Monthly expenses areas follows: commissions, $12,150; rent, $2,650; other expenses(excluding depreciation), 8% of sales. Assume that these expensesare paid monthly. Depreciation is $2,550 for the quarter andincludes depreciation on new assets acquired during thequarter.
h. Equipment will beacquired for cash: $3,830 in January and $8,100 in February.
i. Management would like to maintaina minimum cash balance of $5,000 at the end of each month. Thecompany has an agreement with a local bank that allows the companyto borrow in increments of $1,000 at the beginning of each month,up to a total loan balance of $50,000. The interest rate on theseloans is 1% per month, and for simplicity, we will assume thatinterest is not compounded. The company would, as far as it isable, repay the loan plus accumulated interest at the end of thequarter.
Required:
Using the data above, complete thefollowing statements and schedules for the second quarter:
1. Schedule of expected cashcollections:
January | February | March | Total | |||
Cash sales | $31,800.00 | |||||
Credit sales | 36,900.00 |
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Total collections | $68,700.00 |
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2. a. Merchandise purchasesbudget:
January | February | March | Total | |||
Budgeted cost of goods | $55,650.00 | * | $62,160.00 | |||
Add desired ending inventory | 12,432.00 | â | ||||
Total needs | 68,082.00 | |||||
Less beginning inventory | 11,130.00 |
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Required purchases | $56,952.00 |
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*$79,500.00 sales à 70% =$55,650.00. | ||||||
â $88,800.00 Ã 70% Ã 20% =$12,432.00. | ||||||
b. Schedule of expected cashdisbursements for merchandise purchases:
January | February | March | Total | ||
December purchases | $32,880.00 | * | $32,880.00 | ||
January purchases | 14,238.00 | $42,714.00 | 56,952.00 | ||
February purchases | 0.00 | ||||
March purchases | 0.00 |
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Total cash disbursements forpurchases | $47,118.00 |
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*Beginning balance of the accountspayable. | |||||
3. Schedule of expected cashdisbursements for selling and administrative expenses:
January | February | March | Total | |
Commissions | $12,150.00 | |||
Rent | 2,650.00 | |||
Other expenses | 6,360.00 |
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Total cash disbursements forselling | $21,160.00 |
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4. Cash budget:
January | February | March | Total | |
Cash balance, beginning | $ 6,700.00 | |||
Add cash collections | 68,700.00 |
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Total cash available | 75,400.00 |
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Less cash disbursements: | ||||
For inventory | 47,118.00 | |||
For operating expenses | 21,160.00 | |||
For equipment | 3,830.00 |
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Total cash disbursements | 72,108.00 |
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Excess (deficiency) of cash | 3,292.00 | |||
Financing | ||||
Etc. |
5. Prepare an incomestatement for the quarter ending March 31 as shown in Chapter7.
6. Prepare a balancesheet as of March 31.
Hancock Company, a merchandisingcompany, prepares its master budget on a quarterly basis. Thefollowing data have been assembled to assist in preparation of themaster budget for the second quarter.
a. As of December 31(the end of the prior quarter), the companyâs balance sheet showedthe following account balances:
Cash | $ 6,700 | |||
Accounts receivable | 36,900 | |||
Inventory | 11,130 | |||
Buildings and equipment (net) | 120,000 | |||
Accounts payable | $ 32,880 | |||
Common stock | 100,000 | |||
Retained earnings |
| 41,850 | ||
$174,730 | $174,730 | |||
b. Actual andbudgeted sales are as follows:
December (actual) | $61,500 |
January | $79,500 |
February | $88,800 |
March | $89,400 |
April | $58,100 |
c. Sales are 40% forcash and 60% on credit. All payments on credit sales are collectedin the month following the sale. The accounts receivable atDecember 31 are a result of December credit sales.
d. The companyâs grossmargin percentage is 30% of sales. (In other words, cost of goodssold is 70% of sales.)
e. Each monthâs endinginventory should equal 20% of the following month's budgeted costof goods sold.
f. One-quarter of a monthâsinventory purchases is paid for in the month of purchase; the otherthree-quarters are paid for in the following month. The accountspayable at December 31 are the result of December purchases ofinventory.
g. Monthly expenses areas follows: commissions, $12,150; rent, $2,650; other expenses(excluding depreciation), 8% of sales. Assume that these expensesare paid monthly. Depreciation is $2,550 for the quarter andincludes depreciation on new assets acquired during thequarter.
h. Equipment will beacquired for cash: $3,830 in January and $8,100 in February.
i. Management would like to maintaina minimum cash balance of $5,000 at the end of each month. Thecompany has an agreement with a local bank that allows the companyto borrow in increments of $1,000 at the beginning of each month,up to a total loan balance of $50,000. The interest rate on theseloans is 1% per month, and for simplicity, we will assume thatinterest is not compounded. The company would, as far as it isable, repay the loan plus accumulated interest at the end of thequarter.
Required:
Using the data above, complete thefollowing statements and schedules for the second quarter:
1. Schedule of expected cashcollections:
January | February | March | Total | |||
Cash sales | $31,800.00 | |||||
Credit sales | 36,900.00 |
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Total collections | $68,700.00 |
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2. a. Merchandise purchasesbudget:
January | February | March | Total | |||
Budgeted cost of goods | $55,650.00 | * | $62,160.00 | |||
Add desired ending inventory | 12,432.00 | â | ||||
Total needs | 68,082.00 | |||||
Less beginning inventory | 11,130.00 |
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Required purchases | $56,952.00 |
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*$79,500.00 sales à 70% =$55,650.00. | ||||||
â $88,800.00 Ã 70% Ã 20% =$12,432.00. | ||||||
b. Schedule of expected cashdisbursements for merchandise purchases:
January | February | March | Total | ||
December purchases | $32,880.00 | * | $32,880.00 | ||
January purchases | 14,238.00 | $42,714.00 | 56,952.00 | ||
February purchases | 0.00 | ||||
March purchases | 0.00 |
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Total cash disbursements forpurchases | $47,118.00 |
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*Beginning balance of the accountspayable. | |||||
3. Schedule of expected cashdisbursements for selling and administrative expenses:
January | February | March | Total | |
Commissions | $12,150.00 | |||
Rent | 2,650.00 | |||
Other expenses | 6,360.00 |
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Total cash disbursements forselling | $21,160.00 |
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4. Cash budget:
January | February | March | Total | |
Cash balance, beginning | $ 6,700.00 | |||
Add cash collections | 68,700.00 |
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Total cash available | 75,400.00 |
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Less cash disbursements: | ||||
For inventory | 47,118.00 | |||
For operating expenses | 21,160.00 | |||
For equipment | 3,830.00 |
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Total cash disbursements | 72,108.00 |
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Excess (deficiency) of cash | 3,292.00 | |||
Financing | ||||
Etc. |
5. Prepare an incomestatement for the quarter ending March 31 as shown in Chapter7.
6. Prepare a balancesheet as of March 31.
_______________________________________-
Can you tell me if I made anymistakes ?
| Schedule of Expected CashCollection | |||||||
| January | February | March | Quarter | ||||
| Cash Sales | 31,800 | 35,520 | 35,760 | 103,080 | |||
| Credit Sales | 36,900 | 47,700 | 53,280 | 137,880 | |||
| Total Cash Collection | 68,700 | 83,220 | 89,040 | 240,960 | |||
| Merchadinse Purchase Budget | |||||||
| January | February | March | Quarter | ||||
| Budget COGS | 55,650 | 62,160 | 62,580 | 180,390 | |||
| Add: Desired EndingInventory | 12,432 | 12,516 | 8,134 | 8,134 | |||
| Total Needs | 68,082 | 74,676 | 70,714 | 188,524 | |||
| Less: Beginning Inventory | -11130 | -12432 | -12156 | -11130 | |||
| Requirede Purchase | 56,952 | 62,244 | 58,558 | 177,394 | |||
| Schedue of Expected Cash Disbursment formerchandise purpose | |||||||
| January | February | March | Quarter | ||||
| For Dec. Purchase | 32,800 | 32,800 | |||||
| For Jan. Purchase | 12,238 | 42,714 | 56,952 | ||||
| For Feb. Purchase | 15,561 | 46,683 | 62,244 | ||||
| For March Purchase | 14,550 | 14,550 | |||||
| Total cash disbuersments forpurchase | 47,118 | 58,275 | 61,233 | 166,626 | |||
| Schedule of Cash Expenses | |||||||
| January | February | March | Quarter | ||||
| Commission | 12,150 | 12,150 | 12,150 | 36,450 | |||
| Rent | $2,650 | $2,650 | $2,650 | $7,950 | |||
| Other Expenses | $6,360 | 7,104 | 7152 | $20,616 | |||
| Total Cash Disbursment forexpenses | 21,160 | 21,904 | 21,952 | 65,016 | |||
| Cash Budget | |||||||
| January | February | March | Quarter | ||||
| Beginning Cash Balance | 6,700 | 5,292 | 5,233 | 67,000 | |||
| Add: | |||||||
| Cash Collection | 68,700 | 83,220 | 89,040 | 240,960 | |||
| Total Cash Available | 75,400 | 88,512 | 94,273 | 307,960 | |||
| Less: Cash Disbursment | |||||||
| Inventory Purchase | 47,118 | 58,275 | 61,233 | 166,626 | |||
| Operating Expenses | 21,160 | 21,904 | 21,952 | 65,016 | |||
| Equipment Purchase | 3,830 | 8,100 | 11,930 | ||||
| Total Cash Disbursment | 72,108 | 88,279 | 83,185 | 243,572 | |||
| Excess of cash | 3,292 | 233 | 11,088 | 4,089 | |||
| Financing | |||||||
| Borrowing | 2,000 | 5,000 | 7,000 | ||||
| Repayments | 5000 | -5000 | |||||
| Interest(2,000*0.03)+(3000*0.02) | 120 | -120 | |||||
| Total Financing | 2,000 | 5,000 | 5,120 | ||||
| Cash Balance Ending | 5,292 | 5,233 | 5,968 | 5,968 | |||
| Hancock Company Income Statement for the QuarterEndend March 30 | |||||||
| Sales | 257,200 | ||||||
| COGS | |||||||
| BeginningInventory | 11,130 | ||||||
| Add Purchase | 177,394 | ||||||
| Goods availablefor Sale | 188,524 | ||||||
| Ending Inventory | 8,134 | 180,390 | |||||
| Gross Margin | 77,310 | ||||||
| Other expenses | |||||||
| Commission | 36,450 | ||||||
| Rent | 7,950 | ||||||
| Depreciation | 7,650 | ||||||
| Other expenses | 20,616 | 72,666 | |||||
| Net Operating Income | 4,644 | ||||||
| Interest Expenses | 120 | ||||||
| Net Income | 4524 | ||||||
| Balance Sheet | |||||||
| Assets | |||||||
| Current Assets | |||||||
| Cash | 5,968 | ||||||
| Accountrecivable | 53,640 | ||||||
| Inventory | 8,134 | ||||||
| Total Current Assets | 67,742 | ||||||
| Building and Equpimentnet | |||||||
| (120,000+3830+8100-7650) | 124,280 | ||||||
| Total Assets | 192,022 | ||||||
| Liabilities and Equity | |||||||
| Accountpayable | 43,648 | ||||||
| Loan | 2,000 | ||||||
| StockHolder's Equity: | |||||||
| CapitalStock | 100,000 | ||||||
| RetainedEarnings | 46,374 | 146,374 | |||||
| Total Liabilities andEquity | 192,022 | ||||||
You have just been hired as a new management trainee 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 experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. 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 priceâ$17 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):
| January (actual) | 23,600 | June (budget) | 53,600 |
| February (actual) | 29,600 | July (budget) | 33,600 |
| March (actual) | 43,600 | August (budget) | 31,600 |
| April (budget) | 68,600 | September (budget) | 28,600 |
| May (budget) | 103,600 | ||
The concentration of sales before and during May is due to Motherâs 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 $5.80 for a pair of earrings. One-half of a monthâs purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a monthâs sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
| Variable: | |||
| Sales commissions | 4 | % of sales | |
| Fixed: | |||
| Advertising | $ | 380,000 | |
| Rent | $ | 36,000 | |
| Salaries | $ | 142,000 | |
| Utilities | $ | 16,000 | |
| Insurance | $ | 4,800 | |
| Depreciation | $ | 32,000 | |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $25,000 in new equipment during May and $58,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $28,500 each quarter, payable in the first month of the following quarter.
The companyâs balance sheet as of March 31 is given below:
| Assets | ||
| Cash | $ | 92,000 |
| Accounts receivable ($50,320 February sales; $592,960 March sales) | 643,280 | |
| Inventory | 159,152 | |
| Prepaid insurance | 30,000 | |
| Property and equipment (net) | 1,130,000 | |
| Total assets | $ | 2,054,432 |
| Liabilities and Stockholdersâ Equity | ||
| Accounts payable | $ | 118,000 |
| Dividends payable | 28,500 | |
| Common stock | 1,160,000 | |
| Retained earnings | 747,932 | |
| Total liabilities and stockholdersâ equity | $ | 2,054,432 |
The company maintains a minimum cash balance of $68,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $68,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections, by month and in total.
c. A merchandise purchases 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 month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $68,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
Prepare a master budget for the three-month period ending June 30 that includes a sales budget, by month and in total.
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Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash collections, by month and in total.
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Prepare a master budget for the three-month period ending June 30 that includes a merchandise purchases budget in units and in dollars. Show the budget by month and in total.
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Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash disbursements for merchandise purchases, by month and in total.
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Prepare a master budget for the three-month period ending June 30 that includes a cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $68,000. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
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Prepare a master budget for the three-month period ending June 30 that includes a budgeted income statement for the three-month period ending June 30. Use the contribution approach.
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Prepare a master budget for the three-month period ending June 30 that includes a budgeted balance sheet as of June 30.
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