
Concept explainers
1.
Prepare monthly sales budgets for each of the first three months of 2016.
1.

Explanation of Solution
Sales Budget: The sales budget is the budget prepared to estimate the revenue, the expected number of units to be sold and the expected selling price for each product. The sales budget is the first step for an operating budget and the basis for the production and cost of goods sold budget.
Prepare monthly sales budgets for each of the first three months of 2016:
Company I | |||
Sales Budgets | |||
January, February, and March 2016 | |||
Budgeted Units | Budgeted Unit Price | Budgeted Total Dollars | |
January 2016 | 6,000 | $45 | $270,000 |
February 2016 | 8,000 | 45 | 360,000 |
March 2016 | 10,000 | 45 | 450,000 |
Total for the first quarter | 24,000 | $1,080,000 |
Table (1)
Therefore, the total estimated sales units and dollar amount for the first quarter is 24,000 units and $1,080,000.
2.
Prepare monthly merchandise purchases budgets for each of the first three months of 2016.
2.

Explanation of Solution
Purchases budget: This budget shows the expected purchase requirement for the budgeted period.
Prepare monthly merchandise purchases budgets for each of the first three months of 2016:
Company I | ||||
Merchandise Purchases Budgets | ||||
January, February, and March 2016 | ||||
January | February | March | Total | |
Next month’s budgeted sales | 8,000 | 10,000 | 9,000 | |
Ratio of inventory to future sales | × 25% | × 25% | × 25% | |
Budgeted ending inventory | 2,000 | 2,500 | 2,250 | |
Add: Budgeted sales | 7,000 | 8,000 | 10,000 | |
Required available merchandise | 8,000 | 10,500 | 12,250 | |
Less: Beginning inventory | (5,000) | (2,000) | (2,500) | |
Units to be purchased | 3,000 | 8,500 | 9,750 | 21,250 |
Budgeted cost per unit | $30 | $30 | $30 | $30 |
Budgeted merchandise purchases | $90,000 | $255,000 | $292,500 | $637,500 |
Table (2)
Therefore, the total estimated purchase units and dollar amount for the first quarter is 21,250 units and $637,500.
3.
Prepare monthly selling expense budgets for each of the first three months of 2016.
3.

Explanation of Solution
Selling expense budget: This budget shows the estimated selling expenses for the budgeted period.
Prepare monthly selling expense budgets for each of the first three months of 2016:
Company I | ||||
Selling Expense Budgets | ||||
January, February, and March 2016 | ||||
January | February | March | Total | |
Budgeted sales | $270,000 | $360,000 | $450,000 | |
Sales commission percent | × 20% | × 20% | × 20% | |
Sales commissions expense | 54,000 | 72,000 | 90,000 | $216,000 |
Sales salaries | 7,500 | 7,500 | 7,500 | 22,500 |
Total selling expenses | $61,500 | $79,500 | $97,500 | $238,500 |
Table (3)
Therefore, the total budgeted selling expense budget for the first quarter is $238,500.
4.
Prepare monthly general and administrative expense budgets for each of the first three months of 2016.
4.

Explanation of Solution
General and administrative expense budget: This budget shows the estimated General and administrative expenses for the budgeted period.
Prepare monthly general and administrative expense budgets for each of the first three months of 2016:
Company I | ||||
General and Administrative Expense Budgets | ||||
January, February, and March 2016 | ||||
January | February | March | Total | |
Salaries | $12,000 | $12,000 | $12,000 | $36,000 |
Maintenance | 3,000 | 3,000 | 3,000 | 9,000 |
6,375 | 7,375 | 7,675 | 21,425 | |
Total expenses | $21,375 | $22,375 | $22,675 | $66,425 |
Table (4)
Working note 1: Compute the depreciation expense for each month,
Annual Amount | January | February | March | Total | |
Equipment owned on 12/31/2015 |
$67,500 |
$5,625 |
$5,625 |
$5,625 |
$16,875 |
Purchased in January | 9,000 | 750 | 750 | 750 | 2,250 |
Purchased in February | 12,000 | 0 | 1,000 | 1,000 | 2,000 |
Purchased in March | 3,600 | 0 | 0 | 300 | 300 |
Totals | $6,375 | $7,375 | $7,675 | $21,425 |
Table (5)
Therefore, the total budgeted general and administrative expense for the first quarter is $66,425.
5.
Prepare monthly capital expenditure budgets for each of the first three months of 2016.
5.

Explanation of Solution
Capital expenditure budget: Capital expenditure budget is reports the dollar amounts expected to be spent on the purchase of additional assets like plant, machinery which are used to carry the budgeted business activities.
Prepare monthly capital expenditure budgets for each of the first three months of 2016:
Company I | |||
Capital Expenditures Budgets | |||
January, February, and March 2016 | |||
January | February | March | |
Equipment purchases | $72,000 | $96,000 | $28,800 |
Land purchase | 0 | 0 | 150,000 |
Total | $72,000 | $96,000 | $178,800 |
Table (6)
Therefore, the total budgeted capital expenditure for the months January, February, and March are $72,000, $96,000, and $178,800 respectively.
6.
Prepare monthly cash budgets for each of the first three months of 2016.
6.

Explanation of Solution
Prepare monthly cash budgets for each of the first three months of 2016
Company I | |||
Cash Budgets | |||
January, February, and March 2016 | |||
January | February | March | |
Beginning cash balance | $ 36,000 | $182,850 | $107,850 |
Cash receipts from customers (Working note 2) | 382,500 | 421,500 | 355,500 |
Total cash available (A) | 418,500 | 604,350 | 463,350 |
Cash disbursements: | |||
Payments for merchandise (Working note 3) | 72,000 | 306,000 | 123,000 |
Sales commissions | 54,000 | 72,000 | 90,000 |
Sales salaries | 7,500 | 7,500 | 7,500 |
General & administrative salaries | 12,000 | 12,000 | 12,000 |
Maintenance expense | 3,000 | 3,000 | 3,000 |
Interest ($15,000 x 1%) | 150 | ||
Taxes payable | 90,000 | ||
Purchases of equipment | 72,000 | 96,000 | 28,800 |
Purchase of land | 150,000 | ||
Total cash disbursements (B) | 220,650 | 496,500 | 504,300 |
Preliminary cash balance | $197,850 | $107,850 | $(40,950) |
Repayment of loan to bank | (15,000) | ||
Additional loan from bank | 0 | 0 | 76,950 |
Ending cash balance | $182,850 | $107,850 | $36,000 |
Loan balance, end of month | $0 | $0 | $0 |
Table (7)
Working note 2: Compute the cash receipts from customers:
January | February | March | Total | |
Total sales | $270,000 | $360,000 | $450,000 | $1,080,000 |
Cash sales (25%) | $ 67,500 | $ 90,000 | $112,500 | $270,000 |
Credit sales (75%) | $202,500 | $270,000 | $337,500 | $810,000 |
Cash collections: | ||||
Receivables at 12/31/2015 | $315,000 | $210,000 | 0 | $525,000 |
January credit sale (60%:40%) | 0 | 121,500 | $ 81,000 | 202,500 |
February credit sales (60%:40%) | 0 | 0 | 162,000 | 162,000 |
Total from credit customers | $315,000 | 331,500 | 243,000 | 889,500 |
Cash sales | 67,500 | 90,000 | 112,500 | 270,000 |
Total cash received | $382,500 | $421,500 | $355,500 | $1,159,500 |
Table (8)
Working note 3: Compute the cash payments for merchandise:
January | February | March | Total | ||
Credit purchases | $90,000 | $255,000 | $292,500 | $637,500 | |
Accounts payables at 12/31/2015 | $72,000 | $288,000 | $360,000 | ||
January purchase (20%:80%) | 18,000 | $72,000 | 90,000 | ||
Second month (20%:80%) | 0 | 0 | 51,000 | 51,000 | |
Total paid on purchases | $72,000 | $306,000 | $123,000 | $501,000 |
Table (9)
7.
Prepare a
7.

Explanation of Solution
Budgeted income statement: The budgeted financial statement which reports the budgeted revenues and expenses from business operations and the result of those operations as net income or net loss for a budgeted period is referred to as budgeted income statement.
Prepare a budgeted income statement for the entire first quarter:
Company I | ||
Budgeted Income Statement | ||
For Three Months Ended March 31, 2016 | ||
Amount ($) | Amount ($) | |
Sales | $1,080,000 | |
Cost of goods sold (24,000 units @ $30) | 720,000 | |
Gross profit | 360,000 | |
Operating expenses: | ||
Sales commissions | $216,000 | |
Sales salaries | 22,500 | |
General administrative salaries | 36,000 | |
Maintenance expense | 9,000 | |
Depreciation expense | 21,425 | |
Interest expense | 150 | 305,075 |
Income before taxes | 54,925 | |
Income taxes (40%) | 21,970 | |
Net income | $32,955 |
Table (10)
Therefore, the budgeted net profit for the first quarter is $32,955.
8.
Prepare a budgeted
8.

Explanation of Solution
Budgeted Balance Sheet: Budgeted Balance Sheet is one of the budgeted financial statements which summarize the budgeted assets, the liabilities, and the Shareholder’s equity of a company at a given date.
Prepare a budgeted balance sheet as of March 31, 2016:
Company I | ||
Budgeted Balance Sheet | ||
March 31, 2016 | ||
Assets | ||
Cash (Cash budget) | $36,000 | |
445,500 | ||
Inventory (Working note 5) | 67,500 | |
Total current assets | 549,000 | |
Equipment (Working note 6) | $736,800 | |
Less: | 88,925 | 647,875 |
Land (Capital budget) | 150,000 | |
Total assets | $1,346,875 | |
Liabilities and Equity | ||
Accounts payable (Working note 8) | $ 496,500 | |
Bank loan payable (cash budget) | 76,950 | |
Taxes payable (due 4/15/2016) (Income statement) | 21,970 | |
Total liabilities | 595,420 | |
Common stock (Unchanged) | $472,500 | |
278,955 | ||
Total | 751,455 | |
Total liabilities and equity | $1,346,875 |
Table (11)
Working notes:
Working note 4: compute ending receivables | |
Beginning receivables | $525,000 |
Credit sales | 810,000 |
Less: Collections | (889,500) |
Ending receivables | $445,500 |
Working note 5: Compute the ending inventory | |
Beginning inventory | $150,000 |
Purchases | 637,500 |
Less: Cost of goods sold | (720,000) |
Ending inventory (2,250 units × $30) | $67,500 |
Working note 6: Compute the equipment balance | |
Beginning equipment | $540,000 |
Purchased in January | 72,000 |
Purchased in February | 96,000 |
Purchased in March | 28,800 |
Equipment as on March 31 | $736,800 |
Working note 7: compute the accumulated depreciation | |
Beginning accumulated depreciation | $67,500 |
Depreciation expense | 21,425 |
Accumulated depreciation as on March 31 | $88,925 |
Working note 8: Compute the accounts payable as on March 31 | |
Beginning accounts payable | $360,000 |
Purchases | 637,500 |
Payments | (501,000) |
Accounts payable as on March 31 | $496,500 |
Working note 8: Compute the retained earnings as on March 31 | |
Beginning retained earnings | $246,000 |
Net income | 32,955 |
Retained earnings as on March 31 | 278,955 |
Table (12)
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