Objectives To Develop An Ability To Identify And Assume

Objectivesto Develop An Ability To Identify And Assume An Assigned Rol

Develop an ability to identify and assume an assigned role. To be able to identify and rank the importance of explicit issues. To illustrate the importance of hidden (undirected) issues that arise from a detailed analysis. To identify accounting issues (GAAP/IFRS compliance issues), assess their implications, generate alternatives, and provide recommendations within the bounds of GAAP/IFRS to meet the client’s needs. To examine how accounting standards impact financial measures (ratios, covenants, etc.).

To prepare a coherent report and integrated analysis that meets specific user needs. Instructions In order to complete your case analysis successfully identify the role you are playing, assess the financial reporting landscape considering the user needs, constraints, and business environment, identify the issues, analyze the issues (qualitatively and quantitatively), and provide a recommendation and conclusion. An average grade will result from answering all questions with basic coverage and accuracy, showing all your work. Additional points come from including greater detail, astute, informed commentary where appropriate and connections to readings and other content. Respond in a single Word doc (or comparable text editor).

Background You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. One of the partners in your practice is impressed with the work you have completed to date and would like to give you additional responsibility. She has asked you to take the lead on this engagement with the hope that a successful outcome may lead to your promotion to Senior Consultant. You take the background files from the partner and get started.

Perfect Stitch Replica’s Limited, a nationwide distributor of low-cost imitation clothing, has an exclusive agreement for the distribution of the clothing. Sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. To date, the company's budgeting practices have been minimal, and at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1.

You are anxious to make a favourable impression and have assembled the information below. Additional Information The clothing is sold to retailers for an average price of $10 each. Recent and forecasted sales in units are as follows: Recent and forecast sales: January (actual) 20,000 February (actual) 26,000 March (actual) 40,000 April 65,000 May 100,000 June 50,000 July 30,000 August 28,000 September 25,000 Ending inventories should be equal to 40% of the next month's sales in units. The average cost of the clothing is $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month.

All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected by month-end. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. The company's monthly operating expenses are given below: Variable: Sales commissions (percentage of sales) 4% Fixed: Advertising $200,000 Rent $18,000 Wages and salaries $106,000 Utilities $7,000 Insurance $3,000 Depreciation $14,000 All operating expenses are paid during the month, in cash, with the exception of depreciation and insurance.

Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 is given below: Balance Sheet at March 31: Assets Cash $ 74,000 Accounts receivable 346,000 Inventory* 104,000 Prepaid insurance 21,000 Fixed assets, net of depreciation 950,000 Total assets $1,495,000 Liabilities and Shareholders' Equity Accounts payable $ 100,000 Dividends payable 15,000 Common shares 800,000 Retained earnings 580,000 Total liabilities and shareholders' equity $ 1,495,000

Notes to Balance Sheet: February sales $ 26,000 March sales 320,000 $ 346,000 *Number of units: Dollar amount of inventory 104,000 Divide by cost per unit $ 4 Number of units 26,000 The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month; any repayments are made at the end of the month. The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month, and for simplicity, assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash. Prepare the following budgets for the first three months of 2016: A sales budget by month and in total A schedule of expected cash collections from sales, by month and in total.

Paper For Above instruction

The detailed analysis and preparation of the budgets outlined prior require a comprehensive understanding of the financial landscape of Perfect Stitch Replica’s Limited, alongside effective application of managerial accounting principles. This paper will systematically develop each component of the master budget for the first quarter of 2016, beginning with the sales budget, followed by the cash collections schedule, purchase budget, cash disbursements, cash budget, income statement, and finally, the projected balance sheet. Throughout, the focus remains on ensuring accurate, coherent, and insightful financial planning to support managerial decision-making and stakeholder confidence.

Sales Budget

The sales projections for the upcoming quarter are based on the forecasted units sold each month, multiplied by the average selling price of $10 per unit. The units forecasted are 65,000 in April, 100,000 in May, and 50,000 in June, respectively. The sales revenue per month is thus computed as follows:

• April: 65,000 units × $10 = $650,000
• May: 100,000 units × $10 = $1,000,000
• June: 50,000 units × $10 = $500,000

The total sales for the first quarter amount to $2,150,000. These projections form the foundation for estimating cash inflows, inventory requirements, and other operational considerations.

Cash Collections from Sales

The company's collection policy states 20% of the current month's sales are collected by month-end, 70% in the following month, and 10% in the second month following sale. Therefore, cash collections for each month are calculated by applying these collection rates to the sales figures, considering the appropriate shifting of collections from prior sales.

• April collections: 20% of April sales ($650,000) = $130,000
• May collections: 20% of May sales ($1,000,000) = $200,000; plus 70% of April sales ($650,000) × 70% = $455,000
• June collections: 20% of June sales ($500,000) = $100,000; plus 70% of May sales ($1,000,000) × 70% = $700,000; plus 10% of April sales ($650,000) × 10% = $65,000

Summing these yields total cash collections per month and overall, providing a clear picture of expected cash inflows.

Merchandise Purchase Budget

The purchase requirements depend on forecasted sales, desired ending inventory, and beginning inventory. The ending inventory target for each month is set at 40% of the following month's sales units, adjusted for units to be purchased. Starting with the projected sales, the inventory policy guides the calculation of purchase quantities, ensuring stock levels are adequate without excess. The units to purchase each month are computed as:

• April purchase units = (Ending inventory for April) + (Sales for April) – Beginning inventory

The dollar value of purchases is then obtained by multiplying units by the unit cost of $4. The purchases in dollars are essential for cash disbursement planning and will be detailed subsequently.

Cash Disbursements for Merchandise

The company's cash payment policy stipulates that 50% of purchases are paid in the month of purchase, with the rest paid in the following month. This staggered payment schedule informs the calculation of monthly cash outflows related to inventory purchases. These disbursements are aggregated to prepare the cash budget, ensuring liquidity is maintained in compliance with the $50,000 minimum cash balance requirement.

Cash Budget

The cash budget consolidates all cash inflows and outflows, starting with beginning cash balances, adding collections, deducting disbursements, and factoring in financing activities such as borrowing and repayments. The borrowing process allows for incrementally borrowing in $1,000 units at 1% interest per month, with repayments made at month-end while maintaining the minimum cash reserve. This ensures that short-term liquidity needs are met and that debt levels are managed prudently, with cumulative interest paid at the end of the quarter affecting total expenses and cash flow.

Budgeted Income Statement

Using variable costing, the income statement summarizes revenues, variable costs (primarily sales commissions and cost of goods sold), contribution margin, fixed operating expenses, and net income over the three months. Revenue is based on forecasted sales at $10 per unit. Variable costs include 4% sales commissions and the variable component of cost of goods sold at $4 per unit. Fixed expenses, such as advertising, rent, salaries, utilities, depreciation, and insurance, are aggregated to evaluate overall profitability. The income statement provides critical insights into operational efficiency and profitability under budget assumptions.

Projected Balance Sheet

The budgeted balance sheet as of June 30 reflects projected assets, liabilities, and shareholders’ equity based on the cumulative impact of the budgets. Asset accounts such as cash, accounts receivable, inventory, prepaid insurance, and fixed assets are adjusted for expected transactions. Liabilities include accounts payable, dividends payable, and loans. Shareholders’ equity accounts incorporate retained earnings adjusted for net income and dividends paid. This projection assists in assessing financial position and resource adequacy at the quarter’s end.

Conclusion

This comprehensive budgeting process, grounded in managerial and financial accounting principles, enables Perfect Stitch Replica’s Limited to plan effectively for the upcoming quarter. Accurate forecasts of sales, cash flows, and financial position are vital in ensuring operational continuity, supporting strategic decisions, and maintaining stakeholder confidence. The integration of detailed quantitative analysis with informed assumptions offers a robust foundation for managerial decision-making in a dynamic business environment.

References

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