Question
Kobayashi LLP wants a cash budget for the next three months, beginning January 1, 2015. The company desires an ending minimum cash balance of $10,000 each month. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month. Borrowings and repayments of principal must be in multiples of $1,000. Interest is paid only at the time of payment of principal. The interest rate is 12 percent per annum. (Calculate interest on whole months, e.g., 1/12, 2/12)
The following data have been gathered for the preparation of the cash budget for the first quarter of 2015:
a) Balance sheet as at 31 December 2014 are as follows:
Kobayashi LLP
Balance Sheet as at 31 December 2014
|
Assets
Cash
|
$ 20,000
|
|
Accounts receivable
|
200,000
|
|
Inventory
|
80,000
|
|
Plant and equipment, net
|
500,000
|
|
Total
|
800,000
|
|
Liabilities and Equity
Accounts payable
|
$ 98,000
|
|
Capital stock
|
500,000
|
|
Retained earnings
|
202,000
|
|
Total
|
800,000
|
b) Actual sales for December 2014 and budgeted sales for the next four months are as follows:
December (actual) . . . . . . . . $250,000
|
January . . . . . . . . . . . . . . . .
|
350,000
|
|
February . . . . . . . . . . . . . . . .
|
400,000
|
|
March . . . . . . . . . . . . . . . . .
|
500,000
|
|
April . . . . . . . . . . . . . . . . . .
|
400,000
|
c) Sales are 20 percent for cash and 80 percent on credit. All credit sale terms are net 30; therefore, accounts are collected in the month following sale.
d) The company's gross profit rate is 60 percent of sales.
e) Monthly expenses are budgeted as follows: salaries and wages, $40,000 per month; advertising, $30,000 per month; sales commissions, 3 percent of sales; depreciation, $8,000 per month; other operating expense, 5 percent of sales. These expenses are paid in the month they are incurred.
e) The company's inventory policy is to acquire enough inventories each month to equal the following month's projected cost of goods sold. All purchases are paid for in the month following purchase.
f) The company plans to buy a new machine for $200,000 cash in January. During March, other equipment will be purchased for cash at a cost of $40,000
g) The company will declare and pay $10,000 in cash dividends in January.
Required:
Using the data above, prepare the following schedules for a master budget for the first quarter:
i. Sales budget and schedule of expected cash collections
ii. Cost of goods sold and inventory purchases budget
iii. Schedule of cash disbursements for purchases
iv. Schedule of cash disbursements for expenses
v. Cash budget