Prepare A Master Budget For The 3-Month Period Ending June 3

Prepare a master budget for the 3-month period ending June 30

Have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets across the country. The company has historically done little in terms of budgeting and has faced cash shortages at certain times of the year. Your task is to prepare comprehensive budgets for the upcoming second quarter to demonstrate the benefits of an integrated budgeting program. Using provided data, you will create the following budgets: a sales budget by month and in total, a schedule of expected cash collections from sales, a merchandise purchases budget in units and dollars, a schedule of expected cash disbursements for merchandise purchases, a cash budget, a budgeted income statement, and a budgeted balance sheet as of June 30.

Paper For Above instruction

Introduction

Financial planning is an essential aspect of effective management within any business organization. For Earrings Unlimited, a company engaged in distributing earrings to retail outlets nationwide, implementing a comprehensive budgeting process has become paramount, particularly given the company's historical challenges with cash shortages and limited budgeting practices. This paper presents a detailed second-quarter master budget, encompassing sales, cash collections, merchandise purchases, cash disbursements, a cash budget, an income statement, and a balance sheet, illustrating how integrated financial planning can optimize operations and financial stability.

Sales Budget

The foundation of the budgeting process begins with projecting sales, which for Earrings Unlimited involves calculating estimated units sold per month and total sales revenue. Based on past data and upcoming marketing campaigns, the sales forecast indicates a fluctuating pattern, with a significant increase in May due to Mother's Day promotion. All earrings are priced uniformly at $10 per pair, simplifying revenue calculations. For April, sales are projected at a certain number of units, with increases in May and June aligned to historical trends and seasonal demand.

Expected Cash Collections

Since all sales are on credit, the company must estimate the collection schedule to forecast cash inflows effectively. The collection pattern suggests that 20% of each month's sales are collected within the same month, 70% in the following month, and 10% in the second month after sale. Implementing this schedule provides a realistic projection of monthly cash inflows, essential for liquidity management. For example, a portion of April's sales will be received in April, May, and June, with subsequent collections following the same pattern for subsequent months.

Merchandise Purchases Budget

The company maintains an inventory policy to end each month with stock sufficient to cover 40% of the following month's sales. Calculations involve determining the required ending inventory in units, adding the sales forecast for the month, and subtracting beginning inventory to establish purchase needs. The purchases are priced at $4 per pair, enabling calculation of dollar amounts for each month. This structured approach ensures inventory levels adequately meet customer demand while managing cash flow and storage costs.

Expected Cash Disbursements for Purchases

Payment for merchandise purchases is split evenly, with half paid in the purchase month and the other half in the following month. This cash flow pattern necessitates careful tracking to prevent liquidity shortfalls. The schedule summarizes the monthly disbursements, factoring in the previous month's purchases' remaining payments and the current month's purchases, facilitating accurate cash flow forecasting.

Cash Budget

The cash budget consolidates all cash inflows and outflows to present a monthly view of cash positions. Starting with beginning cash balances, the schedule incorporates collections from sales, disbursements for merchandise, operating expenses, equipment purchases, dividends, and financing activities such as borrowing and repayment. Ensuring a minimum cash balance of $50,000 is critical, necessitating potential borrowing in months where cash shortfalls are projected.

Budgeted Income Statement

The income statement, prepared on a contribution margin basis, reflects projected revenues, variable expenses including cost of goods sold and commissions, fixed operating expenses, and other net income components. This statement provides insight into profitability, supporting managerial decision-making and strategic planning.

Budgeted Balance Sheet

As of June 30, the balance sheet consolidates projected assets, liabilities, and equity. Assets include cash, accounts receivable, inventory, prepaid insurance, and property and equipment. Liabilities primarily comprise accounts payable and dividends payable, while equity encompasses retained earnings and capital stock. The reconciliation of the balance sheet ensures financial statements are balanced and align with budgeting assumptions.

Conclusion

Creating an integrated master budget enables Earrings Unlimited to improve cash flow management, optimize inventory levels, and enhance overall financial control. The detailed projections serve as a roadmap for operational planning, investment decisions, and financial stability. Implementing such a comprehensive budgeting process fosters a disciplined approach to managing resources and preparing for future growth, ultimately contributing to sustainable profitability and organizational success.

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