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CHAPTER 7

The Master Budget


7-A1 (60-90 min.)
1. Exhibit I
VIDEO HUT, INC.
Mall of America Store
Budgeted Income Statement
For the Three Months Ending August 31, 2001
Sales $1,500,000
Cost of goods sold (.60 x $1,500,000) 900,000
Gross profit $ 600,000
Operating expenses:
Salaries, wages, commissions $300,000
Other expenses 60,000
Depreciation 9,000
Rent, taxes and other fixed expenses 165,000 534,000
Income from operations. $ 66,000
Interest expense* 6,180
Net income $ 59,820
* From Exhibit II, $318,000 of principal is outstanding during June
and July, and $318,000 - $212,000 = $106,000 is outstanding during
August. The interest expense accrued is then
$318,000 x .10 x 2/12 + $106,000 x .10 x 1/12
= $5,300 + $880 = $6,183, rounded to $6,180.
Note that this accrual is independent of the cash interest actually paid
($3,530 and $1,530).
Exhibit II
VIDEO HUT, INC.
Mall of America Store
Budgeted Statement of Cash Receipts and Disbursements
For the Three Months Ending August 31, 2001
June July August
Beginning cash balance $29,000 $25,000 $25,470
Minimum cash balance desired 25,000 25,000 25,000
(a) Available cash balance $ 4,000 $ 0 $ 470
Cash receipts & disbursements:
Collections from customers
(schedule b) $ 376,000 $ 607,000 $454,000
Payments for merchandise
(schedule d) (420,000) (240,000) (240,000)
Fixtures (55,000) - -
Salaries, wages, commissions,
@ 20% x sales (140,000) (80,000) (80,000)
Other variable expenses,
@ 4% x sales (28,000) (16,000) (16,000)
Fixed expenses (55,000 ) ( 55,000 )
( 55,000)
(b) Net cash receipts & disbursements $(322,000 ) $ 216,000 $63,000
Excess (deficiency) of cash before
financing (a + b) (318,000 ) 216,000 63,470
Financing:
Borrowing, at beginning of period$ 318,000 $ - $ -
Repayment, at end of period - (212,000) (61,000)
Interest, 10% per annum - (3,530)*
(1,530)**
(c) Total cash increase (decrease)
from financing $318,000 $(215,530) $(62,530)
(d) Ending cash balance (beginning
balance + b + c) $ 25,000 $ 25,470 $ 25,940
*10% x $212,000 x 2/12 = $3,533, rounded to $3,530
**10% x $ 61,000 x 3/12 = $1,525, rounded to $1,530.
Exhibit III
VIDEO HUT, INC.
Mall of America Store
Budgeted Balance Sheet
August 31, 2001
Assets Equities
Cash (Exhibit II) $ 25,940 Accounts payable $180,000
Accounts receivable* 432,000 Notes payable 45,000**
Merchandise inventory 180,000 Accrued interest payable
1,120***
Total current assets $637,940 Total current liabilities$226,120
Net fixed assets: Owners' equity:
$168,000 less $511,000 plus net
depreciation of $9,000 159,000 income of $59,820 570,820
Total assets $796,940 Total equities $796,940
*July sales, 20% x 90% x $400,000 $ 72,000
August sales, 100% x 90% x $400,000 360,000
Accounts receivable (to Exhibit III) $432,000
** $318,000 - $212,000 - $61,000 = $45,000
*** Interest expense of $6,180 less the $3,530 + $1,530 = $5,060 paid
June July August Total
Schedule a: Sales Budget
Credit sales $630,000 $360,000 $360,000
$1,350,000
Cash sales 70,000 40,000 40,000
150,000
Total sales (to Exhibit I) $700,000 $400,000 $400,000
$1,500,000
Schedule b: Cash Collections
June July August
Cash sales $ 70,000 $ 40,000 $ 40,000
On accounts receivable from:
April sales 54,000 - -
May sales 252,000 63,000 -
June sales - 504,000 126,000
July sales - - 288,000
Total collections (to Exhibit II) $376,000 $607,000 $454,000
Schedule c: Purchases Budget May June July August
Desired purchases:
60% x next month's sales $420,000 $240,000 $240,000
$180,000
Schedule d: Disbursements for Purchases
Last month's purchases (to Exhibit II) $420,000 $240,000
$240,000
Accounts payable, August 31, 2001
(to Exhibit III)
$180,000
Cost of goods sold (to Exhibit I) $420,000 $240,000
$240,000
Schedule e: Operating Expense Budget
and
Schedule f: Payments for Operating Expenses
Salaries, wages, commissions,
other @24% of sales $168,000 $ 96,000 $
96,000
2. This is an example of the classical short-term, self-liquidating
loan. The need for such a loan often arises because of the
seasonal nature of many businesses. In times of peak sales, the
payroll and suppliers must be paid in cash that is not then
available. The basic source of cash is proceeds from sales to
customers. However, credit is extended to customers so that
there is a lag between the sale and the collection of the cash.
When the cash is collected, it in turn may be used to repay the
loan. The amount of the loan and the timing of the repayment
are heavily dependent on the credit terms that pertain to both
the purchasing and selling functions of the business.
7-B1 (60-120 min.) $ refers to New Zealand dollars.
1. See Exhibits I, II, and III and supporting schedules a, b, c, d.
2. The cash budget and balance sheet clearly show the benefits of
moving to just-in-time purchasing (though the transition would
rarely be accomplished as easily as this example suggests).
However, the company would be no better off if it left so much of
its capital tied up in cash -- it has merely substituted one asset
for another. At a minimum, the excess cash should be in an
interest bearing account -- the interest earned or forgone is one
of the costs of inventory.
January February March
Schedule a: Sales Budget
Total sales (100% on credit) $62,000 $75,000 $38,000
Schedule b: Cash Collections
60% of current month's sales $37,200 $45,000 $22,800
30% of previous month's sales 7,500 18,600 22,500
10% of second previous month's sales 2,500 2,500 6,200
Total collections $47,200 $66,100 $51,500
December January February March
Schedule c: Purchases Budget
Desired ending inventory $39,050 $ 6,000 $ 6,000 $ 6,000
Cost of goods sold 12,500 31,000 37,500 19,000
Total needed $51,550 $37,000 $43,500
$25,000
Beginning inventory 16,000 39,050 8,050 6,000
Purchases $35,550 $ - $35,450 $19,000
Schedule d: Disbursements
for Purchases
100% of previous month's purchases $35,550 $ - $35,450
March 31 accounts payable $19,000
Exhibit I
AUCKLAND TENT
Budgeted Statement of Cash Receipts and Disbursements
For the Three Months Ending March 31, 20X1
January February March
Cash balance, beginning $ 5,000 $ 5,100$37,692
Minimum cash balance desired 5,000 5,000
5,000
(a) Available cash balance $ 0 $ 100
$32,692
Cash receipts & disbursements:
Collections from customers
(schedule b) $47,200 $66,100 $51,500
Payments for merchandise
(Schedule c) (35,550) - (35,450)
Rent (8,050) (250) (250)
Wages and salaries (15,000) (15,000)
(15,000)
Miscellaneous expenses (2,500) (2,500) (2,500)
Dividends (1,500) -
Purchase of fixtures - -
(4,000)
(b) Net cash receipts & disbursements $(15,400) $48,350 $
(5,700)
Excess (deficiency) of cash before
financing (a + b) (15,400 ) 48,450
26,992
Financing:
Borrowing, at beginning of period $15,500 $ - $ -
Repayment, at end of period - (15,500)
Interest, 10% per annum - (258)
(c) Total effects of financing $15,500 $(15,758) $ -
(d) Cash balance, end (beg. bal. + b + c) $ 5,100 $ 37,692 $31,992
Exhibit II
AUCKLAND TENT
Budgeted Income Statement
For the Three Months Ending March 31, 20X1
Sales (Schedule a) $175,000
Cost of goods sold (Schedule c) 87,500
Gross margin $ 87,500
Operating expenses:
Rent* $17,250
Wages and salaries 45,000
Depreciation 1,200
Insurance 375
Miscellaneous 7,500 71,325
Net income from operations $ 16,175
Interest expense 258
Net income $ 15,917
*[(January-March sales less $10,000) x .10] + (3 x $250)
Exhibit III
AUCKLAND TENT
Budgeted Balance Sheet
March 31, 20X1
Assets
Current assets:
Cash (Exhibit I) $31,992
Accounts receivable* 22,700
Merchandise inventory (Schedule c) 6,000
Unexpired insurance 1,125 $61,817
Fixed assets, net: $12,500 + $4,000 - $1,200 15,300
Total assets $77,117
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable (Schedule d) $19,000
Rent payable 16,500
Dividends payable 1,500 $37,000
Stockholders' equity** 40,117
Total liabilities and stockholders' equity. $77,117
*February sales (.10 x $75,000) plus March sales (.40 x $38,000) =
$22,700
**Balance, December 31, 20X0 $25,700 (=$70,550 - $44,850)
Add: Net income 15,917
Total $41,617
Less: Dividends declared 1,500
Balance, March 31, 20X1 $40,117