Elliott Industries, a wholesale company, is considering whether to open a new distribution center. The center would open January 1, 2021. To make the decision, the planning committee requires a master budget for the center’s first quarter of operation (January, February, and March of 2022). Required You are to construct the first quarter master budget based on the following expectations: January sales are estimated to be $400,000 of which $100,000 will be cash sales and $300,000 will be on credit. The company expects sales to grow 10% per month for the first few months of operation. Prepare a sales budget for the first quarter. The company expects to collect 100% of accounts receivable in the month following the sale. Prepare a schedule of expected cash receipts for the first quarter. Cost of goods sold will be 60% of sales. Company policy is to budget an ending inventory balance equal to 25% of the next month’s projected cost of goods sold. Assume Elliott expects April cost of goods sold to be $314,000. Prepare an inventory purchases budget. All inventory purchases are on account. The company pays 70% of accounts payable in the month of purchase. It pays the remaining 30% in the following month. Prepare a schedule of expected cash payments for inventory purchases. Budgeted monthly selling and administrative expenses are: Salary Expense (Fixed) $24,000 Sales Commissions 5% of Sales Supplies Expense 2% of Sales Utilities (Fixed) $ 1,400 Depreciation on Center Equipment (Fixed)* $ 750 Rent (Fixed) $ 3,600 Miscellaneous (Fixed) $ 900 *The capital expenditures budget shows that Elliott must purchase $100,000 of equipment on January 1 to establish the new center. The equipment supplier allows a thirty-day trial period. Elliott will pay for the equipment on January 31. The equipment is expected to have a 10-year useful life and a $10,000 salvage value. Prepare a selling and administrative expense budget. Sales commissions and utilities are paid in the month after the month in which they are incurred. All other expenses are paid in the month they are incurred. Prepare a schedule of cash payments for selling and administrative expenses. Use the information developed in requirements g and h to determine the amount of sales commissions payable, utilities payable, and accumulated depreciation on the March 31 pro forma balance sheet and the amount of selling and administrative expense on the first quarter pro forma income statement. Using a line of credit, Elliott borrows and repays principal in increments of $1,000 on the last day of the month as needed. It pays interest of 1 percent per month in cash on the last day of the month. Company policy is to maintain an ending cash balance of at least $12,000. Use this information and the schedules prepared in requirements b, e, and h to prepare a cash budget.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Elliott Industries, a wholesale company, is considering whether to open a new distribution center. The center would open January 1, 2021. To make the decision, the planning committee requires a
Required
You are to construct the first quarter master budget based on the following expectations:
- January sales are estimated to be $400,000 of which $100,000 will be cash sales and $300,000 will be on credit. The company expects sales to grow 10% per month for the first few months of operation. Prepare a sales budget for the first quarter.
- The company expects to collect 100% of
accounts receivable in the month following the sale. Prepare a schedule of expected cash receipts for the first quarter.
- Cost of goods sold will be 60% of sales. Company policy is to budget an ending inventory balance equal to 25% of the next month’s projected cost of goods sold. Assume Elliott expects April cost of goods sold to be $314,000. Prepare an inventory purchases budget.
- All inventory purchases are on account. The company pays 70% of accounts payable in the month of purchase. It pays the remaining 30% in the following month. Prepare a schedule of expected cash payments for inventory purchases.
- Budgeted monthly selling and administrative expenses are:
Salary Expense (Fixed) |
$24,000 |
Sales Commissions |
5% of Sales |
Supplies Expense |
2% of Sales |
Utilities (Fixed) |
$ 1,400 |
|
$ 750 |
Rent (Fixed) |
$ 3,600 |
Miscellaneous (Fixed) |
$ 900 |
*The capital expenditures budget shows that Elliott must purchase $100,000 of equipment on January 1 to establish the new center. The equipment supplier allows a thirty-day trial period. Elliott will pay for the equipment on January 31. The equipment is expected to have a 10-year useful life and a $10,000 salvage value. Prepare a selling and administrative expense budget.
- Sales commissions and utilities are paid in the month after the month in which they are incurred. All other expenses are paid in the month they are incurred. Prepare a schedule of cash payments for selling and administrative expenses.
- Use the information developed in requirements g and h to determine the amount of sales commissions payable, utilities payable, and
accumulated depreciation on the March 31 pro formabalance sheet and the amount of selling and administrative expense on the first quarter pro forma income statement.
- Using a line of credit, Elliott borrows and repays principal in increments of $1,000 on the last day of the month as needed. It pays interest of 1 percent per month in cash on the last day of the month. Company policy is to maintain an ending cash balance of at least $12,000. Use this information and the schedules prepared in requirements b, e, and h to prepare a
cash budget .
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