Course Project A Instructions You Have Just Been Hired As A

Course Project A Instructionsyou Have Just Been Hired As A New Managem

You have been hired as a management trainee at Earrings Unlimited, which distributes earrings to retail outlets in shopping malls nationwide. Historically, the company has operated without a formal budgeting process and has experienced cash shortages during parts of the year. To improve financial management, you plan to develop comprehensive budgets for the upcoming second quarter to demonstrate the benefits of integrated budgeting. Using information from accounting and other departments, you will prepare various budgets, including sales, cash collections, merchandise purchases, cash flow, and financial statements, using the provided Excel template.

The company sells all styles of earrings at a uniform price of $10 per pair. Historical sales data for the last three months and budgeted sales for the next six months (in pairs) are available, influenced by Mother's Day sales in May. Inventory policies stipulate maintaining ending inventory equal to 40% of the following month’s sales. Suppliers are paid $4 per pair, with payments split evenly between the month of purchase and the following month. All sales are on credit with a 15-day payment window. Collection patterns are 20% in the month of sale, 70% in the following month, and 10% in the second month after sale; bad debts are negligible. Monthly operating expenses are provided, with insurance paid annually in November. The company plans equipment purchases of $16,000 in May and $40,000 in June, both cash transactions. Dividends of $15,000 are paid monthly at the start of each quarter. The company's ledger as of March 31 is available, along with minimum cash balance requirements of $50,000. Borrowing is permitted in $1,000 increments at a 1% monthly interest rate, with loans repaid at the end of each month along with accumulated interest, ensuring a minimum cash balance is maintained.

Your task is to prepare the master budget covering the period from April 1 to June 30. The required budgets include:

1. Sales budget (monthly and total)
2. Schedule of expected cash collections from sales (monthly and total)
3. Merchandise purchases budget in units and dollars (monthly and total)
4. Schedule of expected cash disbursements for merchandise purchases (monthly and total)
5. Cash budget (monthly and total)
6. Budgeted income statement for the three months, using the contribution approach
7. Budgeted balance sheet as of June 30

Please use the uploaded Excel template provided for this assignment to complete all budget components accurately, integrating the detailed financial data and assumptions described above.

Paper For Above instruction

Developing a comprehensive master budget is essential for effective financial planning and management, especially for a company like Earrings Unlimited, which has historically lacked formal budgeting practices. This paper presents a detailed analysis and construction of a three-month budget for the second quarter, covering April through June, based on provided data and assumptions. The approach emphasizes integrating sales forecasts, cash collections, inventory management, and expenditure planning, incorporating the company's policies and contractual obligations.

The foundation of this budgeting process begins with the sales budget, derived from historical sales data and anticipated seasonal influences such as Mother's Day. Given the sales price of $10 per pair, the sales volume forecasts translate into revenue projections, which in turn inform expected cash collections. The collection schedule accounts for the company's credit terms and historical collection patterns, projecting cash inflows accurately for each month. This detailed forecast allows the company to anticipate liquidity needs and plan for cash surpluses or shortages effectively.

The merchandise purchases budget aligns with sales forecasts, considering inventory policies that require ending inventory to be 40% of the subsequent month's sales. Purchases are calculated in units and dollars, with payments split equally between the month of purchase and the following month. This schedule informs the expected cash disbursements for inventory, which are critical for maintaining cash flow stability. The inventory and purchase planning also integrate supplier payment obligations, aligned with the company's payment terms.

The cash budget synthesizes all inflows and outflows, including sales collections, purchase payments, operating expenses, equipment purchases, dividends, and loan activities. It explicitly assesses the company's liquidity position, identifying months where borrowing may be necessary to sustain the minimum cash balance of $50,000. Loans are modeled with associated interest costs, and repayment involves reducing outstanding borrowings at month-end, factoring in interest accrued, in alignment with the company's borrowing agreement.

The income statement, prepared using the contribution margin approach, consolidates revenue, cost of goods sold, and operating expenses to determine the company's profitability over the quarter. This financial statement facilitates performance evaluation and decision-making, highlighting profit margins and expense management effectiveness.

Finally, the budgeted balance sheet as of June 30 consolidates the projected financial position, including assets, liabilities, and equity, reflecting cumulative effects of operations, investments, and financing activities during the quarter. It serves as a snapshot for assessing the company's financial health and planning future strategies.

Overall, this budgeting exercise demonstrates the integration of various financial components, promotes proactive cash and financial management, and provides a strategic framework to enhance the company's operational efficiency and financial stability. The comprehensive nature of the budget aligns with best practices in managerial finance, underscoring the importance of accurate forecasting, disciplined expense management, and sound financing decisions.

References

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