Jones Company (merchandising), 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. As of December 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances: Cash $ 6,700 Accounts receivable 36,900 Inventory 11,130 Buildings and equipment (net) 120,000 Accounts payable $ 32,880 Common stock 100,000 Retained earnings 41,850 $174,730 $174,730 Actual and budgeted sales are as follows: December (actual) $61,500 January $79,500 February $88,800 March $89,400 April $58,100 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. The company’s gross margin percentage is 30% of sales. (In other words, cost of goods sold is 70% of sales.) Each month’s ending inventory should equal 20% of the following month's budgeted cost of goods sold. One-quarter of a month’s inventory purchases is paid for in the month of purchase; the other three-quarters are paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory. Monthly expenses are as follows: commissions, $12,150; rent, $2,650; other expenses (excluding depreciation), 8% of sales. Assume that these expenses are paid monthly. Depreciation is $2,550 for the quarter and includes depreciation on new assets acquired during the quarter. Equipment will be acquired for cash: $3,830 in January and $8,100 in February. 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: Schedule of expected cash collections: January February March Total Cash sales $31,800.00 Credit sales 36,900.00 Total collections $68,700.00 a. Merchandise purchases budget: January February March Total Budgeted cost of goods $55,650.00 * $62,160.00 Add desired ending inventory 12,432.00 † Total needs 68,082.00 Less beginning inventory 11,130.00 Required purchases $56,952.00 *$79,500.00 sales × 70% = $55,650.00. †$88,800.00 × 70% × 20% = $12,432.00.

January

February

Cash sales

$31,800.00

Credit sales

Total collections

$68,700.00

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 4P

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Jones Company (merchandising), 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.

As of December 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances:

Cash	$ 6,700
Accounts receivable	36,900
Inventory	11,130
Buildings and equipment (net)	120,000
Accounts payable		$ 32,880
Common stock		100,000
Retained earnings		41,850
	$174,730	$174,730

Actual and budgeted sales are as follows:

December (actual)	$61,500
January	$79,500
February	$88,800
March	$89,400
April	$58,100

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.
The company’s gross margin percentage is 30% of sales. (In other words, cost of goods sold is 70% of sales.)
Each month’s ending inventory should equal 20% of the following month's budgeted cost of goods sold.
One-quarter of a month’s inventory purchases is paid for in the month of purchase; the other three-quarters are paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory.
Monthly expenses are as follows: commissions, $12,150; rent, $2,650; other expenses (excluding depreciation), 8% of sales. Assume that these expenses are paid monthly. Depreciation is $2,550 for the quarter and includes depreciation on new assets acquired during the quarter.
Equipment will be acquired for cash: $3,830 in January and $8,100 in February.
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:

Schedule of expected cash collections:

a. Merchandise purchases budget:

	January		February	March	Total
Budgeted cost of goods	$55,650.00	*	$62,160.00
Add desired ending inventory	12,432.00	†
Total needs	68,082.00
Less beginning inventory	11,130.00
Required purchases	$56,952.00

*$79,500.00 sales × 70% = $55,650.00.
†$88,800.00 × 70% × 20% = $12,432.00.

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