Exercise 14-2 Preparing a sales budget
Welch Company, which expects to start operations on January 1, 2011, will sell digital cameras in shopping malls. Welch has budgeted sales as indicated in the following table. The company expects a 10 percent increase in sales per month for February and March. The ratio of cash sales to sales on account will remain stable from January through March.
Sales January February March
Cash sales $ 40,000
Sales on account $100,000
Total budgeted sales $140,000
Required
a. Complete the sales budget by filling in the missing amounts.
b. Determine the amount of sales revenue Welch will report on its first quarter pro forma income statement.
Exercise 14-7 Preparing an inventory purchases budget
Naftel Company sells lamps and other lighting fixtures. The purchasing department manager prepared the following inventory purchases budget. Naftel’s policy is to maintain an ending inventory balance equal to 10 percent of the following month’s cost of goods sold. April’s budgeted cost of goods sold is $75,000.
January February March
Budgeted cost of goods sold $50,000 $54,000 $60,000
Plus: Desired ending inventory 5,400
Inventory needed 55,400
Less: Beginning inventory 5,000
Required purchases (on account) 50,400
Required
a. Complete the inventory purchases budget by filling in the missing amounts.
b. Determine the amount of cost of goods sold the company will report on its first quarter proforma income statement.
c. Determine the amount of ending inventory the company will report on its pro forma balance sheet at the end of the first quarter.
Exercise 14-13 Preparing a cash budget
The accountant for Teresa’s Dress Shop prepared the following cash budget. Teresa’s desires to maintain a cash cushion of $14,000 at the end of each month. Funds are assumed to be borrowed and repaid on the last day of each month. Interest is charged at the rate of 2 percent per month.
Cash Budget July August September
Section 1: Cash receipts Beginning cash balance $42,500
Add cash receipts $180,000 200,000 240,600
Total cash available (a) Section 22,500
2: Cash payments
For inventory purchases $165,526 140,230 174,152
For S&A expenses 54,500 60,560 61,432
For interest expense 0
Total budgeted disbursements (b) Section 220,026
3: Financing activities
Surplus (shortage) $2,474
Borrowing (repayments) (c) 11,526
Ending cash balance (a – b + c) 14,000 14,000 14,000
Required
a. Complete the cash budget by filling in the missing amounts. Round all computations to the nearest whole dollar.
b. Determine the amount of net cash flows from operating activities Teresa’s will report on the third quarter pro forma statement of cash flows.
c. Determine the amount of net cash flows from financing activities Teresa’s will report on the third quarter pro forma statement of cash flows.
Exercise 14-15 Preparing pro forma income statements with different assumptions Norman Jelen, the controller of Wing Corporation, is trying to prepare a sales budget for thecoming year. The income statements for the last four quarters follow.
First Quarter Second Quarter Third Quarter Fourth Q Total
Sales revenue $170,000 200,000 210,000 250,000 840,000
Cost of goods sold 102,000 120,000 126,000 156,000 504,000
Gross profit 68,000 80,000 84,000 104,000 336,000
Selling & admin. expense 15,000 20,000 21,000 26,000 84,000
Net income 71,000 60,000 63,000 78,000 252,000
Historically, cost of goods sold is about 60 percent of sales revenue. Selling and administra- tive expenses are about 10 percent of sales revenue.
Sam Wing, the chief executive officer, told Mr. Jelen that he expected sales next year to be 10 percent for each respective quarter above last year’s level. However, Glenda Sullivan, the vice president of sales, told Mr. Jelen that she believed sales growth would be only 5 percent.
Required
a. Prepare a pro forma income statement including quarterly budgets for the coming year using Mr. Wing’s estimate.
b. Prepare a pro forma income statement including quarterly budgets for the coming year using Ms. Sullivan’s estimate.
c. Explain why two executive officers in the same company could have different estimates of future growth.
Problem 14-16 Preparing a sales budget and schedule of cash receipts
McCarty Pointers Inc. expects to begin operations on January 1, 2012; it will operate as a specialty sales company that sells laser pointers over the Internet. McCarty expects sales in January 2012 to total $200,000 and to increase 10 percent per month in February and March. All sales are on ac- count. McCarty expects to collect 70 percent of accounts receivable in the month of sale, 20 percent in the month following the sale, and 10 percent in the second month following the sale.
Required
a. Prepare a sales budget for the first quarter of 2012.
b. Determine the amount of sales revenue McCarty will report on the first 2012 quarterly proforma income statement.
c. Prepare a cash receipts schedule for the first quarter of 2012.
d. Determine the amount of accounts receivable as of March 31, 2012.
Problem 14-18 Preparing pro forma income statements with different assumptions Top executive officers of Zottoli Company, a merchandising firm, are preparing the next year’s budget. The controller has provided everyone with the current year’s projected income statement.
Current Year
Sales revenue 2,000,000
Cost of goods sold 1,400,000
Gross profit 600,000
Selling & admin. expenses 260,000
Net income 340,000
Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative ex- penses are usually 10 percent of sales plus a fixed cost of $60,000. The president has announced that the company’s goal is to increase net income by 15 percent.
Required
The following items are independent of each other.
a. What percentage increase in sales would enable the company to reach its goal? Support your answer with a pro forma income statement.
b. The market may become stagnant next year, and the company does not expect an increase in sales revenue. The production manager believes that an improved production procedure can cut cost of goods sold by 2 percent. What else can the company do to reach its goal? Prepare a pro forma income statement illustrating your proposal.
c. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $340,000. With the increased ad- vertising, the company expects sales revenue to increase by 15 percent. Assume that cost of goods sold remains a constant proportion of sales. Can the company reach its goal?
Problem 14-20 Preparing a cash budget Kinnion Medical Clinic has budgeted the following cash flows.
January February March
Cash receipts 100,000 106,000 126,000
Cash payments
For inventory purchases 90,000 72,000 85,000
For S&A expenses 31,000 32,000 27,000
Kinnion Medical had a cash balance of $8,000 on January 1. The company desires to main- tain a cash cushion of $5,000. Funds are assumed to be borrowed, in increments of $1,000, and repaid on the last day of each month; the interest rate is 1 percent per month. Kinnion pays its vendor on the last day of the month also. The company had a monthly $40,000 beginning balance in its line of credit liability account from this year’s quarterly results.
Required
Prepare a cash budget. (Round all computations to the nearest whole dollar.)
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