Exercises 7A1 and 7B1

Chapter 7
Book: Administrative Accounting

Subject: Accounting for Decision Making

Section: 898
Teacher: Lic. Fredy Vargas Hernandez
Student : Nancy Veronica Grace 30941215
7A-1 Prepare the master budget

Computer Superstores, Inc., relies heavily on the use of decentralized management. You are the new manager of the
company store in a shopping center in the United States. He knows a lot about buying, displaying, selling and reducing
theft; but knows little about accounting and finance.

General management is convinced that training for senior managers must include the active participation of store
managers in the budgeting process. You have been asked to prepare a complete master budget for your store for June,
July and August; you are responsible for all your preparation. All accounting is done centrally, so you don't have expert
help on the fundamentals. Furthermore, tomorrow the branch manager and the assistant controller will be here to
examine your work; At that time, they will help you formulate the final budget document. The idea is to have him
prepare the budget a few times so that he becomes confident about the accounting aspects. You want to make a
favorable impression on your supervisors, so you gather the following data as of May 31, 2005:

Cash $29,000 Recent and projected sales

Inventory 420,000 April $300,000
Accounts receivable 369,000 May 350,000
Furniture and net accessories 168,000 June 700,000
Total assets 986,000 July 400,000
Accounts payable 475,000 August 400,000
Shareholders' equity 511,000 September 300,000
Liabilities and Shareholders' Equity 988,000

Credit sales represent 90% of total sales. 80% of credit accounts are collected the month following the sale, and 20% in
the following month. Assume that bad debts are insignificant and can be ignored. Accounts receivable as of May 31 are
the result of credit sales for April and May:

(0.20 x 0.90 x $300,000) + (1.0 x 0.90 x $350,000) = $369,000.

The average gross profit on sales is 40%.

The policy is to acquire enough inventory each month to equal the projected cost of sales for the following month. All
purchases are paid for the month following the month they were made.

Salaries, salaries and commissions represent, on average, 20% of sales; all other variable expenses are 4% of sales.
Fixed costs for rent, property taxes, miscellaneous payroll and other items add up to $55,000 a month. Assume that
these variable and fixed costs require cash outlays each month. Depreciation is $2,500 per month.

In June, $55,000 will be disbursed for facilities acquired in May. The accounts payable balance as of May 31 includes
this amount.

Assume that a minimum cash balance of $25,000 must be maintained. Also assume that all loan applications are
effective at the beginning of the month and all repayments are made at the end of the month. Interest is paid only when
the principal is repaid. The interest rate is 10% per year; Round interest calculations to the next $10. All loans and
principal repayments must be made in multiples of one thousand dollars.

1. Prepare a budgeted income statement for the next quarter, a budgeted statement of monthly cash receipts and
disbursements (for each of the next three months), and a budgeted balance sheet as of August 31, 2005. All
operations are valued on a profit before tax basis, so the latter should be ignored here.

2. Explain why a bank loan is necessary and what operating sources supply cash to repay the bank loan.

Development of Problem 7A1:

Planning Horizon: June, July and August
1. Sales Budget
June July August
Sales 700,000 400,000 400,000
Cash 10% 70,000 40,000 40,000
Credit 90% 630,000 360,000 360,000

2.Cash collection budget

80% of credit accounts are collected the month following the sale, and 20% in the following month. Assume that bad
debts are insignificant and can be ignored. Accounts receivable as of May 31 are the result of credit sales for April and
May: (0.20 x 0.90 x $300,000) + (0.8 x 0.90 x $350,000) = $306,000.

June July August Due in September

Cash 10% 70,000 40,000 40,000 360,000
(Credit 80% 1 month before) 252,000 504,000 288,000
(Credit 20% 2months before ) 54,000 63,000 126,000 72,000
376,000 607,000 454,000 432,000

3.Purchasing budget
The average gross profit on sales is 40%. The policy is to acquire enough inventory each month to equal the projected
cost of sales for the following month.

June July August

Final inventory 240,000 240,000 180,000
+Cost of sales 420,000 240,000 240,000
=Available merchandise 660,000 480,000 420,000
-Initial inventory 420,000 240,000 240,000
=Total Purchases 240,000 240,000 180,000

4.Purchase Disbursement Budget

All purchases are paid for the month following the month they were made.

June July August

Shopping 420,000 240,000 240,000

5. Operating Expenses Budget

June July August
Fixed Salaries and Salaries 140,000 80,000 80,000

Variable expends 4% 28,000 16,000 16,000

Fixed costs 55,000 55,000 55,000
Depreciation 2,500 2,500 2,500
Insurance - - - .
Total Operating Expenses 225,500 153,500 153,500

6. Operating Expenses Disbursement Budget

June July August
Fixed Salaries and Salaries 140,000 80,000 80,000

Variable expends 4% 28,000 16,000 16,000

Fixed costs 55,000 55,000 55,000
Total Operating Expenses 223,000 151,000 151,000
7. Cash Flow Budget
June July August

Cash Inflows
Initial balance 29,000 25,000 25,460
Collections (P.2) 376,000 607,000 454,000
Extraordinary Entries - - - .
Total Tickets 405,000 632,000 479,460
Cash outflows
Purchases (P.4) 420,000 240,000 240,000
Operating Expenses (P.6) 223,000 151,000 151,000
Purchase of Equipment/Facilities 55,000 - -
Dividend Payment - - -
Bond Purchase - - -
Buy shares - - - .
Subtotal Outputs 698,000 391,000 391,000
(+)Minimum Desired Balance 25,000 25,000 25,000
(=)Total Outputs 713,000 416,000 416,000
Leftover/Shortage (318,000) 216,000 63,460
Loan 318,000
Capital 212,000 61,000
Interests 3,540 1,530
(=) Financial Input/Output 318,000 (215,540) 62,530
Desired Final Balance 25,000 25,460 25,930

8. Income Statement
Statement of income
Computer Superstores Inc.
From June 1 to August 31, 20XX
Consolidated
Income (p.1.) 1,500,000
Cost of Sales (P.3.) 900,000
Gross profit 600,000
Operating Expenses (P5) 532,500
Operating Profit 67,500
Financial Expenses (P7) 5,070
Profit before Tax 62,430

9. Budgeted Balance Sheet

Balance sheet
Computer Superstores Inc.
As of August 31, 20XX
Current assets
Cash (P7) 25,930
Accounts receivable (P1/2) 432,000
Inventory (P3) 180,000
Prepaid Insurance (P.5) --
637,930
Non-Current Assets
Installation equipment and others 168,000
Accumulated Depreciation (P.5) (7,500) 160,500
Total Assets 798,430
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable (P.4) 240,000
Loan payable (P.7) 45,000
Salaries and Commissions payable (P.5) 0 .
225,000
Shareholders' Capital
Social capital 511,000
Period utility 62,430 573,430

Total Liabilities + Capital 798,430

7B-1 Prepare the master budget

Victoria Kite Company, a small business in Melbourne that sells kites on the Web, wants a master budget for the next
three months, starting January 1, 2005. You want a minimum ending cash balance of $5,000 each month. Sales were
forecast at an average wholesale price of $8 per kite. In January, Victoria Kite is initiating just-in-time (JIT) deliveries
from suppliers, meaning purchases equal expected sales.

On January 1, purchases will cease until inventory reaches $6,000, after which purchases will equal sales. Merchandise
costs average $4 per kite. Purchases during any given month are paid in full during the following month. All sales are
on credit, payable within 30 days, but experience has shown that 60% of current sales are collected in the current
month, 30% in the following month, and 10% in the next. later month. Bad debts are insignificant.

The monthly operating expenses are as follows:

Wages and salaries $15,000

Expired insurance 125
Depreciation 250
Miscellaneous 2,500
Rent $250/month + 10% of sales
Quarterly over $10,000
Cash dividends of $1,500 will be paid quarterly, beginning on January 15, and are declared on the 15th of the following
month. All operating expenses are paid as incurred, except insurance, depreciation and rent. Rent of $250 is paid at the
beginning of each month, and the additional 10% of sales is paid quarterly on the 10th of the month following the end
of the quarter. The next payment is due on January 10.

The company plans to acquire some new facilities for $3,000 in cash in March.

Money can be borrowed and repaid in multiples of $500 at an interest rate of 10% per year. Management wants to
minimize borrowing and repay loans quickly. Interest is calculated and paid when the principal has been repaid.
Assume that loan applications occur at the beginning, and repayments occur at the end of the months in question.
Money is never borrowed at the beginning and is repaid at the end of the same month. Calculate the interest and
approximate it to the nearest unit.

Assets Passives
as of December 31, 2004 As of December 31, 2004
Cash $5,000 Accounts payable $35,550
(merchandise)
Accounts receivable 12,500 Dividends payable 1,500
Inventory* 39,050 Rent payable 7,800
Prepaid insurance 1,500 $44,850
Fixed assets, net 12,500
$70,550
*inventory balance as of November 30 = $16,000

Actual and forecast sales:

October 38,000 December 25,000 February 75,000 April 45,000
November 25,000 January 62,000 March 38,000
1. Prepare a master budget that includes a budgeted income statement, a balance sheet, a statement of cash receipts and
disbursements, and supporting schedules (or schedules) for the months of January through March 2005.

2. Explain why a bank loan is necessary and what operational sources provide the cash for its repayment.

Development of Problem 7B1:

Planning Horizon: January, February and March 2005
You want a minimum ending cash balance of $5,000 each month.
Sales were forecast at an average wholesale price of $8 per kite.
In January, Victoria Kite is initiating just-in-time (JIT) deliveries from suppliers, meaning purchases equal expected
sales.
On January 1, purchases will cease until inventory reaches $6,000, after which purchases will equal sales.
Merchandise costs average $4 per kite.
Purchases during any given month are paid in full during the following month.
All sales are on credit, payable within 30 days, but experience has shown that 60% of current sales are collected in the
current month, 30% in the following month, and 10% in the next. later month. Bad debts are insignificant.

1. Sales Budget
January February March April
Sales 62,000 75,000 38,000 45,000
Sale price 8 8 8
No. of units sold 7,750 9,375 4,750

2.Cash collection budget

January February March April (what

remains
In the month 60% 37,200 45,000 22,800 due March 31)
Next credit month 30% 7,500*x the balance 18,600 22,500 11,400
Credit 2 month 10% 2,500 2,500 6,200 4,500 3,800
Total 47,200 66,100 51,500 19,700

3.Purchasing budget

Dec January February March

Final inventory 39,050 6,000 43,500 62,500

+Cost of sales (50%) 12,500 31,000 37,500 19,000
=Available merchandise 51,550 37,000 81,000 81,500
-Initial inventory 16,000 23,050 6,000 43,500
=Total Purchases 35,550 13,950 75,000 38,000

4.Purchase Disbursement Budget

Purchases during any given month are paid in full during the following month.

January February March

Shopping 35,550 13,950 75,000

5. Operating Expenses Budget

January February March
Wages and salaries 15,000 15,000 15,000
Miscellaneous 2,500 2,500 2,500
Rent
Fixed 250 250 250
Variable 6,200 7,500 3,800
Total Income 6,450 7,750 4,050
Depreciation 250 250 250
Insurance 125 125 125
Total Operating Expenses 24,325 26,625 21,695

6. Operating Expenses Disbursement Budget

January February March
Wages and salaries 15,000 15,000 15,000
Miscellaneous 2,500 2,500 2,500
Rent
Fixed 250 250 250
Variable 7,800 0 0
Total Income 8,050 250 250
Total Operating Expenses 25,550 17,750 17,750

7. Cash Flow Budget

January February March
Cash Inflows
Initial balance 5,000 5,100 23,740
Collections (P.2) 47,200 66,100 51,500
Extraordinary Entries - - - .
Total Tickets 52,200 71,200 73,240
Cash outflows
Purchases (P.4) 35,550 13,950 75,000
Operating Expenses (P.6) 25,550 17,750 17,750
Purchase of Equipment/Facilities - - 3,000
Dividend Payment 1,500 - -
Bond Purchase - - -
Buy shares - - - .
Subtotal Outputs 62,600 31,700 95,750
(+)Minimum Desired Balance 5,000 5,000 5,000
(=)Total Outputs 67,600 36,700 100,750
Leftover/Shortage (15,400) 34,500 (25,510)
Loan 15,500 25,000
Capital 15,500
Interests 260
(=) Financial Input/Output 15,500 (15,760) 25,000
Desired Final Balance 5,100 23,740 5,510

8. Income Statement
Statement of income
Victoria Kite Company
From January 1 to March 31, 2005
Consolidated
Income (p.1.) 175,000
Cost of Sales (P.3.) 87,500
Gross profit 87,500
Operating Expenses (P5) 72,645
Operating Profit 14,855
Financial Expenses (P7) 260
Profit before Tax 14,595

9. Budgeted Balance Sheet

Balance sheet
Victoria Kite Company
 As of March 31, 2005
Current assets
Cash (P7) 5,510
Accounts receivable (P1/2) 19,700
Inventory (P3) 62,500
Prepaid Insurance (P.5) 1,125
88,835
Non-Current Assets
Installation equipment and others 3,000
Fixed assets, net 12,500
Accumulated Depreciation (P.5) (750) 14,750
Total Assets 103,585

Liabilities and Shareholders' Equity

Current Liabilities
Accounts payable (P.4) 38,000
Loans payable (P7) 25,000
Salaries and Commissions payable (P.5) 0 .
63,000
Shareholders' Capital
Social capital ¿??? *Not given
Period utility 14,595

Total Liabilities + Capital