Camden Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2019. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks:
Required
Round all computations to the nearest whole dollar.
a. October sales are estimated to be $125,000, of which 40 percent will be cash and 60 percent will be credit. The company expects sales to increase at the rate of 8 percent per month. Prepare a sales budget.
b. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts.
c. The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $6,000. Assume that all purchases are made on account. Prepare an inventory purchases budget.
d. The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the following month. Prepare a cash payments budget for inventory purchases.
e. Budgeted selling and administrative expenses per month follow:
Salary expense (fixed)…………………………….$9,000
Sales commissions…………………………..5% of Sales
Supplies expense…………………………….2% of Sales
Utilities (fixed) …………………………….………$ 700
Depreciation on store fixtures (fixed)* …………..$2,000
Rent (fixed) …………………………….………..$2,400
Miscellaneous (fixed) ………………………………$600
*The capital expenditures budget indicates that Camden will spend $82,000 on October 1 for store fixtures, which are expected to have a $10,000 salvage value and a three-year (36-month) useful life.
Use this information to prepare a selling and administrative expenses budget.
f. Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses.
g. Camden borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 1 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $6,000 cash cushion. Prepare a cash budget.
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h. Prepare a pro forma income statement for the quarter.
i. Prepare a pro forma balance sheet at the end of the quarter.
j. Prepare a pro forma statement of cash flows for the quarter.
SOLUTION
a. & b.
Sales Budget
Pro Forma
Pro Forma
Oct.
Oct.
Nov.
Nov.
Dec.
Dec.
Data
Data
Cash sales
$ 50,000
$ 50,000
$ 54,000
$ 54,000
$ 58,320
$ 58,320
Sales on account
75,000
75,000
81,000
81,000
87,480
87,480
$ 87,480(a)
$ 87,480(a)
Total budgeted sales
$125,000
$125,000
$135,000
$135,000
$145,800
$145,800
405,800(b)
405,800(b)
Schedule of Cash Receipts
Oct.
Oct.
Nov.
Nov.
Dec.
Dec.
Current cash sales
$50,000
$50,000
$ 54,000
$ 54,000
$ 58,320
$ 58,320
Plus collections from A/R
0
0
75,000
75,000
81,000
81,000
Total collections
$50,000
$50,000
$129,000
$129,000
$139,320
$139,320
$318,320 (c)
$318,320 (c)
(a) Ending accounts receivable balance appearing on balance sheet. (b) Sales revenue appearing on income statement (sum of monthly amounts). (c) Cash receipts from customers on statement of cash flows (sum of monthly amounts).
c. and d.
Inventory Purchases Budget
Pro Forma
Oct.
Nov.
Dec.
Data
Budgeted cost of goods sold
$75,000
$81,000
$87,480
$243,480(a)
Plus: Desired ending inventory
8,100
8,748
6,000
6,000(b)
Inventory needed
83,100
89,748
93,480
Less: Beginning inventory
0
8,100
8,748
Required purchases (on account)
$83,100
$81,648
$84,732
25,420(c)
Schedule of Cash Payments Budget for Inventory Purchases
Pmt. of current month's accts. pay.
$58,170
$57,154*
$59,312*
Pmt. for prior month's accts. pay.
0
24,930
24,494
Total budgeted pmts. for inventory
$58,170
$82,084
$83,806
$224,060(d)
(a) Cost of goods sold appearing on pro forma income statement (sum of monthly amounts). (b) Ending inventory balance appearing on pro forma balance sheet. (c) Ending accounts payable balance appearing on pro forma balance sheet ($84,732 - $59,312). (d) Cash payments for inventory purchases (sum of monthly amounts). *Rounded
e. and f.
Selling and Administrative Expense Budget
Pro Forma
Oct.
Nov.
Dec.
Data
Salary expense
$ 9,000
$ 9,000
$ 9,000
Sales commissions, 5% of sales
6,250
6,750
7,290
$7,290(a)
Supplies expense, 2% of sales
2,500
2,700
2,916
Utilities
700
700
700
700(b)
Depreciation on store fixtures
2,000
2,000
2,000
6,000(c)
Rent
2,400
2,400
2,400
Miscellaneous
600
600
600
Total S&A expenses
$23,450
$24,150
$24,906
72,506(d)
Schedule of Cash Payments for S&A Expenses
Salary expense
$9,000
$ 9,000
$ 9,000
Prior month's sales comm., 100%
0
6,250
6,750
Supplies expense
2,500
2,700
2,916
Prior month's utilities, 100%
0
700
700
Depreciation on store fixtures
0
0
0
Rent
2,400
2,400
2,400
Miscellaneous
600
600
600
Total payments for S&A expenses
$14,500
$21,650
$22,366
$58,516 (e)
Depreciation is a noncash charge.
(a) Ending sales commissions payable account balance shown on pro forma balance sheet. (b) Ending utilities payable account balance shown on pro forma balance sheet. (c) Accumulated depreciation appears on the pro forma balance sheet (sum of monthly amounts). (d) S&A expense appearing on pro forma income statement (sum of monthly amounts). (e) Total cash payments for S&A expenses on pro forma statement of cash flows (sum of monthly amounts).
g.
Cash Budget
Pro Forma
Oct.
Nov.
Dec.
Data
Beginning cash balance
$ 0
$ 6,330
$ 6,000
Add cash receipts
50,000
129,000
139,320
$318,320(a)
Cash available (w)
50,000
135,330
145,320
Less payments
For inventory purchases
58,170
82,084
83,806
$224,060(b)
For S&A expenses
14,500
21,650
22,366
58,516(c)
Purchase of store fixtures
82,000
0
0
82,000(d)
Interest expense*
0
1,110
865*
1,975 (f)
Total budgeted payments (x)
154,670
104,844
107,037
Payments minus receipts
Surplus (shortage) (w – x)
(104,670)
30,486
38,283
Financing activity
Borrowing (repayment) (y)
111,000
(24,486)
(32,283)
54,231(e)
Ending cash balance (w – x+ y)
$ 6,330
$ 6,000
$ 6,000
6,000(g)
*October ($0 x 0.01); November ( $111,000 x 0.01); December [( $111,000 – $24,486) x 0.01] (a) Operating activities section of pro forma Statement of Cash Flows (sum of monthly amounts). (b) Operating activities section of pro forma Statement of Cash Flows (sum of monthly amounts). (c) Operating activities section of pro forma Statement of Cash Flows (sum of monthly amounts). (d) Investing activities section of pro forma Statement of Cash Flows. The investment in store fixtures also appears on the pro forma balance sheet. (e) Financing activities section of pro forma Statement of Cash Flows (sum of monthly amounts). It also appears on the pro forma Balance sheet. (f) Operating activities section of pro forma Statement of Cash Flows (sum of monthly amounts). (g) The ending cash balance appears on the pro forma balance sheet and as the last item on the pro forma statement of cash flows.
h.
Camden Company Pro Forma Income Statement For the Quarter Ended December 31, 2019
Sales revenue
$405,800
Cost of goods sold
(243,480)
Gross margin
162,320
S&A expenses
(72,506)
Operating income
89,814
Interest expense
(1,975)
Net income
$ 87,839
i.
Camden Company Pro Forma Balance Sheet December 31, 2019
Assets
Cash
$ 6,000
Accounts receivable
87,480
Inventory
6,000
Store fixtures
$82,000
Accumulated depreciation
(6,000)
Book value of fixtures
76,000
Total assets
$175,480
Liabilities
Accounts payable
$ 25,420
Utilities payable
700
Sales commissions payable
7,290
Line of credit liability
54,231
Equity
Retained earnings
87,839
Total liabilities and equity
$175,480
j.
Camden Company Pro Forma Statement of Cash Flows For the Quarter Ended December 31, 2019