Part B Master Budget You Have Just Been Hired As A Ne 093895

Part B Master Budgetyou Have Just Been Hired As a New Management Trai

Part B: Master Budget You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$10 per pair.

Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) 30,000; February (actual) 20,000; March (actual) 50,000; April (budget) 70,000; May (budget) 95,000; June (budget) 45,000; July (budget) 40,000; August (budget) 30,000; September (budget) 20,000.

Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Suppliers are paid $3 for a pair of earrings, with 40% of a month’s purchases paid in the month of purchase and 60% paid in the following month. All sales are on credit, with 30% collected in the same month, 60% in the following month, and 10% in the second month following sale.

Monthly operating expenses include variable sales commissions (5% of sales), and fixed expenses such as advertising ($190,000), rent ($20,000), salaries ($100,000), utilities ($8,000), insurance ($3,000), and depreciation ($14,000). Insurance is paid annually in November.

At the end of June, the company received a $4,000 deposit for July sales, which is recorded as a liability. The company plans to purchase $20,000 worth of equipment in May and $60,000 in June, both for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The March 31 balance sheet shows assets of $1,495,000, with $74,000 in cash, $370,000 in accounts receivable, $80,000 in inventory, $21,000 in prepaid insurance, and property and equipment (net) of $950,000; liabilities include accounts payable of $100,000 and dividends payable of $15,000.

The company maintains a minimum cash balance of $50,000 and can borrow funds in increments of $1,000 at 1% monthly interest, repaid in full at month-end along with any accumulated interest. Borrowing is done at the beginning of the month.

Your task is to prepare a comprehensive master budget for the three months ending June 30, including a sales budget, schedule of expected cash collections, merchandise purchases budget, schedule of expected cash disbursements, a cash budget, a budgeted income statement, and a budgeted balance sheet, following specific format requirements detailed above.

Paper For Above instruction

Preparing a master budget is fundamental for effective financial planning and control within a company. In the context of Earrings Unlimited, developing this quarterly budget involves meticulous forecasting of sales, purchases, cash flows, and income, all aligned with strategic operational goals. The process starts with creating a detailed sales budget based on past actuals and future projections, setting the foundation for subsequent cash collection schedules. Accurate estimation of cash inflows from credit sales—considering collection patterns—is crucial for liquidity management. Simultaneously, the merchandise purchases budget, based on inventory policies and sales forecasts, ensures stock availability without overstocking—critical for working capital efficiency.

Cash disbursements for purchases, operating expenses, and planned capital expenditures must be prudently scheduled to maintain minimal cash reserves. Creating the cash budget, incorporating collections, disbursements, borrowings, and repayments, enables tracking short-term liquidity positioning, ensuring the company meets its minimum cash requirement. The budgeted income statement, constructed using the contribution approach, synthesizes projected revenues and expenses, providing insights into profitability before financing activities. Finally, the prepared budgeted balance sheet offers a snapshot of projected financial position, highlighting assets, liabilities, and equity after all planned activities.

This comprehensive budgeting process demands attention to detail, accuracy in assumptions, and systematic planning. It allows Earrings Unlimited to proactively manage cash flow, optimize operations, and make informed strategic decisions. The detailed schedules, including calculations and justifications underpinning each figure, serve as vital tools for management to monitor progress, identify potential cash shortages or surpluses, and adjust operational strategies accordingly. Ultimately, this exercise underscores the importance of disciplined financial planning as an integral component of sustainable business growth.

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