Question

Nadia Company, a merchandising company, prepares its master budget on a quarterly basis. The following data has been assembled to assist in preparation of the master budget for the second quarter.

a. As of March 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances:
Cash $9,000
Acct Receviable 48,000
Inventory 12,6000
Buildings & Equip. (net) 214,100
Acct. Payable 18,300
Common Stock 190,000
Retained Earnings 75,400
Totals 283,700 283,700
b. Sales for March total 10,000 units. Each month’s sales are expected to exceed the prior month’s results by 5%. The product selling price is $25.00 per unit.
c. Sales are 20% for the cash and 80% on credit. All payments on credit sales are collected in the month following the sale. The accounts receivable at March 31 are a result of March credit sales.
d. Company’s policy calls for a given month’s ending inventory to equal 80% of the next month’s expected unit sales. The March 31 inventory is 8,400 units, which complies with the policy. The purchase price is $15.
e. Monthly selling and administrative expenses are budgeted as follows: salaries and wages, $7500 per month; shipping 6% of sales; advertising, $6,000 per month; other expenses, 4% of sales. Depreciation including depreciation on new assets acquired during the quarter, will be $6,000 for the quarter. Sales representatives’ commissions are 12.5 % of sales and are paid in the month of the sales. The sales manager’s salary will be $3,500 in April and $4,000 per month thereafter.
f. Half a month’s inventory purchases are paid in the month of purchase and half in the following month.
g. Equipment purchases during the quarter will be as follows: April, $11,500; and May, $3,000.
h. Dividends totaling $3,500 will be declared and paid in June.
j. No cash payment for income taxes are to be made during the second calendar quarter. Income taxes will be assessed at 35% for the quarter.
k. Management wants to maintain a minimum cash balance of $8,000. 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 balance of $20,000. The interest rate of these loans is 1% per month, and for simplicity, we will assume that the 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 above data, complete the following statements and schedules for the second quarter.
1. Expected cash receipts from customers
2. Expected cash payments for purchases
3. Cash budget

Answer 1

Nadia Company

1. Schedule of expected cash receipts from customers :

April May June

Cash 20% $52,500 $55,125 $57,880

Credit 80% 48,000 210,000 220,500

Total receipts $100,500 $265,125 $278,380

2. Schedule of expected cash payments for purchases :

Payment for purchases: April May June

50% (month of purchase) $81,900 $85,995 $90,293

50% (following month) 18,300 81,900 85,995

Total cash payment $100,300 $167,895 $176,288

3. Statement of Cash budget for the second quarter ended June 30:

April May June Total

Beginning cash balance $9,000 ($58,363) ($23,649) $9,000

Cash receipts from customer 100,500 265,125 278,380 644,005

Total cash available $109,500 $206,762 $254,731 $653,005

Cash payments:

Purchases $100,300 $167,895 $176,288 $444,483

Selling & Administrative 76,063 79,516 82,615 238,194

Equipment purchase 11,500 3,000 14,500

Dividends 3,500 3,500

Total cash payments: $187,863 $250,411 $262,403 $700,677

Cash shortfall ($78,363) ($43,649) ($7,672)

Bank overdraft 20,000 20,000 16,000 56,000

Cash balance ($58,363) ($23,649) $8,328 $8,328

Step-by-step explanation:

a) Data:

Nadia Balance Sheet as of March 31:

Cash $9,000

Acct Receivable 48,000

Inventory 12,6000

Buildings & Equip. (net) 214,100

Total $283,700

Acct. Payable $18,300

Common Stock 190,000

Retained Earnings 75,400

Total $283,700

b) Sales:

Month Quantity Unit Price Total

March 10,000 units $25.00 $250,000

April = 10,500 (10,000 x 1.05) " $262,500

May = 11,025 (10,500 x 1.05) " $275,625

June = 11,576 (11,025 x 1.05) " $289,400

July = 12,155 (11,576 x 1.05) " $303,875

c) Sales Terms:

March April May June

Cash 20% $52,500 $55,125 $57,880

Credit 80% 48,000 210,000 220,500

d) Inventory:

March April May June

8,400 8,820 9,261 9,724

Ending $126,000 $132,300 $138,915 $145,860

Beginning $126,000 $132,000 $138,915

e) Selling & Administrative Expenses

April May June Total

Salaries and wages $7,500 $7,500 $7,500 $22,500

Shipping 15,750 16,538 17,364 49,652

Advertising 6,000 6,000 6,000 18,000

Others 10,500 11,025 11,576 33,101

Depreciation 6,000

Sales commissions 32,813 34,453 36,175 104,441

Sales Manager's Salary 3,500 4,000 4,000 11,500

Total $76,063 $79,516 $82,615

f) Purchases of Inventory

April May June Total

Ending Inventory 8,820 9,261 9,724

Units of Inventory sold 10,500 11,025 11,576

Inventory available for sale 19,320 20,286 21,300

less beginning inventory 8,400 8,820 9,261

Purchases 10,920 11,466 12,039

Cost of purchases x $15 $163,800 $171,990 $180,585

Payment for purchases: April May June

50% (month of purchase) $81,900 $85,995 $90,293

50% (following month) 18,300 81,900 85,995

Total cash payment $100,300 $167,895 $176,288

g) April May June

Equipment purchase $11,500 $3,000

h) Nadia Company's preparation of quarter budgets helps it to foresee cash shortages and make necessary arrangements to meet up with cash obligations. It focuses management efforts to achieve sales and deliver on other perimeters, including the control of expenses. It is important for the master budget to be prepared with inputs from other subsidiary budgets so that management plans ahead.