Higher Colleges Of Technology Dubai Mens College

Careful Camels Company

Careful Camels Companys management asks you to prepare its master budget using the following information. The budget is to cover the months of April, May and June 2011. Careful Camels Company Balance Sheet As at 31st March 2011 Assets Cash Accounts Receivable Inventory Total Current Assets: Equipment (Gross) Accumulated Depreciation Equipment (Net) Liabilities and Equity 50,000 Accounts Payable 175,000 Short Term Notes Payable 126,000 Total Current Liabilities: 351,000 Long Term Note Payable 480,000 Total Liabilities: (90,000) Common Stock 390,000 Retained Earnings Total Stockholders Equity: 156,000 12,000 168,000 200,000 368,000 235,000 138,000 373,000

Total Assets:

741,000 Total Liabilities and Equity:

741,000

Additional Information: a) b) Sales for March total 10,000 units. Each months sales are expected to exceed the prior months results by 5%. The products selling price is 25 per unit. Company policy calls for a given months ending inventory to equal 80% of the next months expected unit sales. The 31st March inventory is 8,400 units, which complies with this policy. The purchase price is 15 per unit. Sales representatives commissions are 12.5% of sales and are paid in the month of the sales. The sales managers monthly salary will be 3,500 in April and 4,000 per month thereafter. Monthly general and administrative expenses include 8,000 administrative salaries, 5,000 depreciation and 0.9% monthly interest on the long term note payable. The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale [none is collected in the month of the sale].

c)

d)

e)

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f) g) All merchandise purchases are on credit, and no payables arise from any other transactions. One months purchases are fully paid in the next month. The minimum ending cash balance for all months is 50,000. If necessary, the company borrows enough cash using a short term note to reach the minimum. Short term notes require an interest payment of 1% at each month end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short term notes payable balance. Dividends of 100,000 are to be declared and paid in May. No cash payments for income taxes are to be made during the second calendar quarter. Income taxes will be assessed at 35% in the quarter. Equipment purchases of 55,000 are scheduled for June.

h) i) j)

Required: Prepare the following budgets and other financial information as required: 1. 2. 3. 4. 5. 6. 7. 8. Sales budget, including budgeted sales for July. (a) Purchases budget, (b) the budgeted cost of goods sold for each month and quarter, and (c) the cost of the 30th June budgeted inventory. Selling expense budget. General and administrative expense budget. Expected cash receipts from customers and the expected 30th June balance of accounts receivable. Expected cash payments for purchases and the expected 30 th June balance of accounts payable. Cash budget. Budgeted income statement.

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Planning the Solution

1. The sales budget shows expected sales for each month in the quarter. Start by multiplying March sales by 105% and then do the same for the remaining months. Julys sales are needed for the purchases budget. To complete the budget, multiply the expected unit sales by the selling price of 25 per unit. 2. Use these results and the 80% inventory policy to budget the size of ending inventory for April, May and June. Add the budgeted sales to these numbers and subtract the actual or expected beginning inventory for each month. The result is the number of units to be purchased each month. Multiply these numbers by the per unit cost of 15. Find the budgeted cost of goods sold by multiplying the unit sales in each month by the 15 cost per unit. Compute the cost of the 30th June ending inventory by multiplying the expected units available at that date by the 15 cost per unit. 3. The selling expense budget has only two items. Find the amount of the sales representatives commissions by multiplying the expected amount in sales in each month by the 12.5% commission rate. Then include the sales managers salary of 3,500 in April and 4,000 in May and June. 4. The general and administrative expense budget should show three items. Administrative salaries are fixed at 8,000 per month and depreciation is 5,000 per month. Budget the monthly interest expense on the long term note by multiplying its 200,000 balance by the 0.9% monthly interest rate. 5. Determine the amounts of cash sales in each month by multiplying the budgeted sales by 30%. Add to this amount the credit sales of the prior month (computed as 70% of prior months sales). Aprils cash receipts from collecting receivables equal the 31st March balance of 175,000. The expected 30th June accounts receivable balance equals 70% of Junes total budgeted sales. 6. Determine expected cash payments on accounts payable for each month by making them equal to the merchandise purchases in the prior month. The payments for April equal the 31st March balance of accounts payable shown on the beginning balance sheet. The 30th June balance of accounts payable equals merchandise purchases for June. BMAC 250 Page 3 of 9

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7. Prepare the cash budget by combining the given information and the amounts of cash receipts and cash payments on account that you computed. Complete the cash budget for each month by either borrowing enough to raise the preliminary balance to the minimum or paying off short term debt as much as the balance allows without falling below the minimum. Show the ending balance of the short term note in the budget. 8. Prepare the budgeted income statement by combining the budgeted items for all three months. Determine the income before income taxes and multiply it by the 35% rate to find the quarters income tax expense.

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Solution to the Problem

1. Sales Budget April 10,000 500 10,500 May 10,500 525 11,025 June 11,025 551 11,576 July 11,576 579 12,155

Prior periods unit sales Plus 5% growth Projected unit sales

Projected unit sales Selling price per unit Projected sales

10,500 x 25 262,500

11,025 x 25 275,625

11,576 x 25 289,400 827,525

2(a) Purchases Budget Next periods unit sales (Part 1) Ending inventory percent Desired ending inventory Current periods unit sales (Part 1) Units to be available Less beginning inventory Units to be purchased

April 11,025 x 80% 8,820 10,500 19,320 8,400 10,920

May 11,576 x 80% 9,261 11,025 20,286 8,820 11,466

June 12,155 x 80% 9,724 11,576 21,300 9,261 12,039

Quarter

Budgeted cost per unit Projected purchases

x 15 163,800

x 15 171,990

x 15 180,585 516,375

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2(b) Budgeted Cost of Goods Sold This periods unit sales (Part 1) Budgeted cost per unit Projected cost of goods sold

April 10,500 x 15 157,500

May 11,025 x 15 165,375

June 11,576 x 15 173,640

Quarter

496,515

2(c) Budgeted Inventory for 30th June Units (Part 2) Cost per unit Total

June 9,724 x 15 145,860

3. Selling Expense Budget Budgeted Sales Commission percent Sales commissions Managers salary Projected selling expenses

April 262,500 x 12.5 32,813 3,500 36,313

May 275,625 x 12.5 34,453 4,000 38,453

June 289,400 x 12.5 36,175 4,000 40,175

Quarter 827,525 x 12.5 103,441 11,500 114,941

4. General and Administrative Expense Budget Administrative salaries Depreciation Interest on long term note payable (0.9% x 200,000) Projected expenses

April 8,000 5,000 1,800 14,800

May 8,000 5,000 1,800 14,800

June 8,000 5,000 1,800 14,800

Quarter 24,000 15,000 5,400 44,400

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5. Expected Cash Receipts from Customers Budgeted sales (Part 1) Ending accounts receivable (70%) Cash receipts: Cash sales (30%) Collections of prior periods receivables Total cash to be collected

April 262,500 183,750

May 275,625 192,938

June 289,400 202,580

Quarter

78,750 175,000 253,750

82,687 183,750 266,437

86,820 192,938 279,758

248,257 551,688 799,945

6. Expected Cash Payments to Suppliers Cash payments (Equal to prior periods purchases) Expected 30th June balance of accounts payable (June purchases)

April 156,000

May 163,800

June 171,990 180,585

Quarter 491,790

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7. Cash Budget Beginning cash balance Cash receipts (Part 5) Total cash available Cash Payments: Payments for merchandise (Part 6) Sales commissions (Part 3) Salaries: Sales (Part 3) Administrative (Part 4) Interest on long term note (Part 4) Dividends Equipment purchase Interest on short term notes: April (12,000 x 1.0%) June (6,099 x 1.0%) Total Cash Payments Preliminary balance Additional loan Loan repayment Ending cash balance: Ending short term notes

April 50,000 253,750 303,750

May 89,517 266,437 355,954

June 50,000 279,758 329,758

156,000 32,813

163,800 34,453

171,990 36,175

3,500 8,000 1,800

4,000 8,000 1,800 100,000

4,000 8,000 1,800

55,000

120 0 202,233 101,517

0 0 312,053 43,901 6,099

0 61 277,026 52,732

(12,000) 89,517 0

0 50,000 6,099

(2,732) 50,000 3,367

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8. Budgeted Income Statement Careful Camels Company Budgeted Income Statement For the Quarter Ended 30th June 2011 Sales (Part 1) Cost of goods sold (Part 2) Gross profit: 827,525 496,515 331,010

Operating expenses: Sales commissions (Part 3) Sales salaries (Part 3) Administrative salaries (Part 4) Depreciation (Part 4) Interest on long term note (Part 4) Interest on short term notes (Part 7) Total operating expenses: Income before income taxes Income taxes (35%) Net Income 103,441 11,500 24,000 15,000 5,400 181 159,522 171,488 60,021 111,467

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