Chapter 14, Problem 23P

a)

To determine

Prepare a sales budget.

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 a sales budget:

Sales Budget
Particulars	October	November	December	Total
Cash sales (40% of sales)	$100,000	$108,000	$116,640
Sales on account (60% of sales)	$150,000	$162,000	$174,960
Total budgeted sales	$250,000	$270,000	$291,600	$811,600

Table (1)

Note: The sales have increased by 8 percent per month.

b)

To determine

Prepare a schedule of cash receipts

Explanation of Solution

Prepare a schedule of cash receipts:

Schedule of cash receipts
Particulars	October	November	December	Total
Current cash sales	$100,000	$108,000	$116,640
Add: Collections from Accounts receivable	$0	$150,000	$162,000
Total collections	$100,000	$258,000	$278,640	$636,640

Table (2)

c)

To determine

Prepare inventory purchase budget

Explanation of Solution

Production budget: Production budget is the estimation or projection of number of units the company needs to produce to equate the planned sales or budgeted sales and inventory.

Prepare inventory purchase budget:

Inventory Purchases Budget
Particulars	October	November	December	Total
Budgeted cost of goods sold	$150,000	$162,000	$174,960	$486,960
Add:  Desired ending inventory (60% of sales)	$16,200	$17,496	$12,000	$12,000
Inventory needed	$166,200	$179,496	$186,960
Less: Beginning inventory (10% of next month’s cost of goods sold)	$0	$16,200	$17,496
Required purchases (on account)	$166,200	$163,296	$169,464	$50,839

Table (3)

d)

To determine

Prepare a cash payment budget for inventory purchase.

Explanation of Solution

Cash payments budget: This budget shows the total cash disbursements for the budgeted period.

Construct a cash payment budget for inventory purchase:

Schedule of Cash Payments Budget for Inventory Purchases
Particulars	October	November	December	Total
Required purchases (on account)	$166,200	$163,296	$169,464	$50,839
70 % of Payment of current month's accounts payable	$116,340	$114,307	$118,625
30% of Payment for prior month's accounts payable	$0	$49,860	$48,989
Total budgeted payments for inventory	$116,340	$164,167	$167,614	$448,121

Table (4)

e)

To determine

Prepare a selling and administrative expenses budget.

Explanation of Solution

Selling and administrative expense budget: This budget shows the estimated selling and administrative expenses for the budgeted period.

Prepare a selling and administrative expenses budget:

Selling and Administrative Expense Budget
Particulars	October	November	December	Pro forma Data
Salary expense	$18,000	$18,000	$18,000
Sales commissions, 5% of sales	$12,500	$13,500	$14,580	$14,580 (a)
Supplies expense, 2% of sales	$5,000	$5,400	$5,832
Utilities	$1,400	$1,400	$1,400	$1,400 (b)
Depreciation on store fixtures	$4,000	$4,000	$4,000	$12,000 (c)
Rent	$4,800	$4,800	$4,800
Miscellaneous	$1,200	$1,200	$1,200
Total S&A expenses	$46,900	$48,300	$49,812	$145,012 (d)

Table (5)

f)

To determine

Construct a cash payments budget for selling and administrative expenses

Explanation of Solution

Construct a cash payments budget for selling and administrative expenses:

Schedule of cash Payments for selling and administrative expenses
Particulars	October	November	December	Pro forma Data
Salary expense	$18,000	$18,000	$18,000
Prior month's sales commission 100%	$0	$12,500	$13,500
Supplies expense	$5,000	$5,400	$5,832
Prior month's utilities, 100%	$0	$1,400	$1,400
Depreciation on store fixtures	$0	$0	0
Rent	$4,800	$4,800	$4,800
Miscellaneous	$1,200	$1,200	$1,200
Total payments for S&A expenses	$29,000	$43,300	$44,732	$117,032 (e)

Table (6)

g)

To determine

Prepare a cash budget.

Explanation of Solution

Cash Budget: This budget gives an estimation of all the cash inflows and outflows of a business for the future financial period.

Prepare a cash budget:

Cash Budget
Particulars	October	November	December	Total
Beginning cash balance	$0	$12,660	$12,000
Add cash receipts	$100,000	$258,000	$278,640	$636,640
Cash available (1)	$100,000	$270,660	$290,640
Less: Payments
For inventory purchases	$116,340	$164,167	$167,614	$448,121
For S&A expenses	$29,000	$43,300	$44,732	$117,032
Purchase of store fixtures	$164,000	$0	$0	$164,000
Interest expense	$0	$2,220	$1,730	$3,950
Total budgeted payments (2)	$309,340	$209,687	$214,076
Payments minus receipts
Surplus (shortage)  $\left(1\right)-\left(2\right)$	($209,340)	$60,973	$76,564
Financing activity
Borrowing (repayment) (3)	$222,000	($48,973)	($64,564)	$108,463
Ending cash balance $\left(1\right)-\left[\left(2\right)+\left(3\right)\right]$	$12,660	$12,000	$12,000	$12,000

Table (7)

Workings note 1: Determine the interest expense for the month of November:

$\begin{array}{c}\text{Interest expense}=\text{ Amount of borrowings}\times \text{Rate of interest}\\ \text{=\$222,000}\times \text{1\%}\\ \text{=\$2,220}\end{array}$

Workings note 2: Determine the interest expense for the month of December:

$\begin{array}{c}\text{Interest expense}=\text{ Amount of borrowings}\times \text{Rate of interest}\\ \text{=}\left(\text{\$222,000}-\$48,973\right)\times \text{1\%}\\ \text{=\$173,027}\times \text{1\%}\\ \text{=\$1,730}\end{array}$

h)

To determine

Prepare a pro forma income statement.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare a pro forma income statement for the quarter:

Company H
Pro Forma Income Statement
For the Quarter Ended December 31, 2015
Sales revenue	$811,600
Less: Cost of goods sold	($486,960)
Gross margin	$324,640
Less: Selling & Administrative expenses	($145,012)
Operating income	$179,628
Less: Interest expense	($3,950)
Net income	$175,678

Table (8)

i)

To determine

Prepare a pro forma balance sheet.

Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare a pro forma balance sheet for the quarter:

Company H
Pro Forma Balance Sheet
December 31, 2015
Assets	Amount	Amount
Cash		$12,000
Accounts receivable		$174,960
Inventory		$12,000
Store fixtures	$164,000
Accumulated depreciation	($12,000)
Book value of fixtures		$152,000
Total assets		$350,960
Liabilities
Accounts payable		$  50,839
Utilities payable		$1,400
Sales commissions payable		$14,580
Line of credit liability		$108,463
Equity
Retained earnings		$175,678
Total liabilities and equity		$350,960

Table (9)

j)

To determine

Prepare a pro forma statement of cash flows.

Explanation of Solution

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Prepare a pro forma statement of cash flows for the quarter:

Company H
Pro Forma Statement of Cash Flows
For the Quarter Ended December 31, 2015
Cash flows from operating activities
Cash receipts from customers	$636,640
Cash payments for inventory	($448,121)
Cash payments for Selling & Administrative expenses	($117,032)
Cash payments for interest expense	($3,950)
Net cash flows from operating activities		$67,537
Cash flows from investing activities
Cash payment for store fixtures		($164,000)
Cash flow from financing activities
Net Inflow from line of credit		$108,463
Net increase in cash		$12,000
Add: Beginning cash balance		$0
Ending cash balance		$12,000

Table (10)