Hancock Company, a merchandising company, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparation of the master budget for the second quarter. a. As of December 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances: Cash $ 15,100 Accounts receivable 57,000 Inventory 20,300 Buildings and equipment (net) 137,000 Accounts payable $ 49,000 Common stock 117,000 Retained earnings 63,400 $ 229,400 $ 229,400 b. Actual and budgeted sales are as follows: December(actual) $ 95,000 January $ 145,000 February $ 200,000 March $ 71,000 April $ 76,000 c. Sales are 40% for cash and 60% on credit. All payments on credit sales are collected in the month following the sale. The accounts receivable at December 31 are a result of December credit sales. d. The company's gross margin percentage is 30% of sales. (In other words, cost of goods sold is 70% of sales.) e. Each month's ending inventory should equal 20% of the following month's budgeted cost of goods sold. f. One-quarter of a month's inventory purchases is paid for in the month of purchase; the other three- quarters is paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory. g. Monthly expenses are as follows: commissions, $29,500; rent, $4,350; other expenses (excluding depreciation), 8% of sales. Assume that these expenses are paid monthly. Depreciation is $4,250 for the quarter and includes depreciation on new assets acquired during the quarter. h. Equipment will be acquired for cash: $5,530 in January and $9,800 in February. i. Management would like to maintain a minimum cash balance of $5,000 at the end of each month. The company has an agreement with a local bank that allows the company to 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 these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: Using the data above, complete the following statements and schedules for the second quarter: 1. Schedule of expected cash collections: 2a. Merchandise purchases 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.
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Hancock Company, a merchandising company, prepares its |
| a. |
As of December 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances: |
| Cash | $ | 15,100 | ||
| |
57,000 | |||
| Inventory | 20,300 | |||
| Buildings and equipment (net) | 137,000 | |||
| Accounts payable | $ | 49,000 | ||
| Common stock | 117,000 | |||
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63,400 | |||
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| $ | 229,400 | $ | 229,400 | |
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| b. | Actual and budgeted sales are as follows: |
| December(actual) | $ 95,000 |
| January | $ 145,000 |
| February | $ 200,000 |
| March | $ 71,000 |
| April | $ 76,000 |
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| c. |
Sales are 40% for cash and 60% on credit. All payments on credit sales are collected in the month following the sale. The accounts receivable at December 31 are a result of December credit sales. |
| d. | The company's gross margin percentage is 30% of sales. (In other words, cost of goods sold is 70% of sales.) |
| e. |
Each month's ending inventory should equal 20% of the following month's budgeted cost of goods sold. |
| f. |
One-quarter of a month's inventory purchases is paid for in the month of purchase; the other three- quarters is paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory. |
| g. |
Monthly expenses are as follows: commissions, $29,500; rent, $4,350; other expenses (excluding |
| h. |
Equipment will be acquired for cash: $5,530 in January and $9,800 in February. |
| i. |
Management would like to maintain a minimum cash balance of $5,000 at the end of each month. The company has an agreement with a local bank that allows the company to 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 these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. |
| Required: | |
| Using the data above, complete the following statements and schedules for the second quarter: | |
| 1. | Schedule of expected cash collections: |
| 2a. |
Merchandise purchases budget. |
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