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Question

. Preparing an inventory purchases budget

 

Tucker Lighting Company sells lamps and other lighting fixtures. The purchasing

 

department manger prepared the following inventory purchases budget. Tucker Lighting’s policy

 

is to maintain an ending inventory balance equal to 10 percent of the following month’s cost of

 

goods sold. April’s budgeted cost of goods sold is $85,000.

 

January

 

February

 

March

 

Budgeted cost of goods sold $70,000

 

$74,000

 

$80,000

 

Plus: Desired ending inventory

 

7,400

 

?

 

?

 

Inventory needed

 

$77,400

 

?

 

?

 

Less: Beginning Inventory

 

18,000

 

?

 

?

 

Required purchases (on account)$59,400

 

?

 

?

 

(a) Complete the inventory purchases budget by filling in the missing amounts.

 

(b)

 

Determine the amount of cost of goods sold the company will report on its first quarter

 

pro forma income statement. (c) Determine the amount of ending inventory the company

 

will report on its pro forma balance sheet at the end of the first quarter.

 

2. Preparing a cash budget: The accountant for Lori’s Dress Shop prepared the following

 

cash budget. Lori’s desires to maintain cash cushion of $14,000 at the end of each month.

 

Funds are assumed to be borrowed and repaid on the last day of each month. Interest is

 

charged as the rate of 2 percent per month.

 

Cash Budget

 

July

 

August

 

September

 

Section 1: Cash receipts

 

Beginning cash balance

 

$43,000

 

$?

 

$?

 

Add cash receipts

 

183,000

 

196,000

 

240,200

 

Total cash available (a)

 

$226,000

 

?

 

?

 

Section 2: Cash payments

 

For inventory purchases

 

163,646

 

139,900

 

172,474

 

For S&A expenses

 

54,000

 

62,060

 

61,536

 

For interest expense

 

0

 

?

 

?

 

Total budgeted disbursements (b) 217,646

 

?

 

?

 

Section (3): Financing activities

 

Surplus (shortage)

 

8,354

 

?

 

?

 

Borrowed (repayments) © 5,646

 

?

 

?

 

Ending cash balance (a – b + c)

 

$14,000

 

$14,000

 

$14,000

 

(a) Complete the cash budget by filling in the missing amounts. Round all computations to

 

the nearest whole dollar.

 

(b) Determine the amount of net cash flows from operating activities Lori’s will report on the

 

third quarter pro forma statement of cash flows.

 

(c)

 

Determine the amount of net

 

cash flows from financing activities Lori’s will report on the third quarter pro forma

 

statement of cash flows.

 

3. Preparing pro forma income statements with different assumptions – Jim Denty, the

 

controller of Grime Corporation, is trying to prepare a sales budget for the coming year.

 

The income statements for the last four quarters follow:

 

First Qt.

 

Second Qt.

 

Third Qt.

 

Fourth Qt.

 

Total

 

Sales revenue

 

$170,000

 

$200,000

 

$210,000

 

$260,000

 

$840,000

 

 

 

Cost of goods sold

 

102,000

 

120,000

 

126,000

 

156,000

 

504,000

 

Gross profit

 

68,000

 

80,000

 

84,000

 

104,000

 

336,000

 

Selling & admin. Expense

 

17,000

 

20,000

 

21,000

 

26,000

 

84,000

 

Net income

 

$51,000

 

$60,000

 

$63,000

 

$78,0 $252,000

 

Historically, cost of goods sold is about 60 percent of sales revenue. Selling and administrative

 

expenses are about 10mpercent of sales revenue. Gene Moreno, the chief executive officer, told

 

Mr. Denty that he expected sales next year to be 10 percent above last year’s level. However,

 

Sarah Toole, the vice president of sales, told Mr. Denty that she believed sales growth would be

 

only 5 percent. (a) prepare a pro forma income statement including quarterly budgets for the

 

coming year using Mr. Moreno’s estimate. (b) Prepare a pro forma income statement including

 

quarterly budgets for the coming year using Ms. Toole’s estimate. (c) Explain why two executive

 

officers in the same company could have different estimates of future growth.

 

4. Preparing a sales budget and schedule of cash receipts-Dorough Pointers Inc. expects to

 

begin operations on January 1, 2009; it will operate as a specialty sales company that

 

sells laser pointers over the Internet. Dorough expects sales in January 2009 to total

 

$120,000 and to increase 10 percent per month in February and March. All sales are on

 

account. Dorough expects to collect 70 percent of account receivable in the month of

 

sale, 20 percent in the month following the sale, and 10 percent in the second month

 

following the sale. (a) Prepare a sales budget for the first quarter of 2009, (b) Determine

 

the amount of sales revenue Dorough will report on the first 2009 quarterly pro forma

 

income statement, (c) Prepare a cash receipts schedule for the first quarter of 2009, (d)

 

Determine the amount of accounts receivable as of March 31, 2009.

 

5. Preparing pro forma income statements with different assumptions – Top executive

 

officers of Leach Company, a merchandising firm, are preparing the next year’s budget.

 

The controller has provided everyone with the current year’s projected income statement.

 

Current Year

 

Sales revenue

 

$2,600,000

 

Cost of goods sold

 

1,690,000

 

Gross profit

 

910,000

 

Selling & admin. expenses

 

325,000

 

Net income

 

 

$585,000

 

 

Cost of goods sold is usually 65 percent of sales revenue, and selling and administrative

 

expenses are usually 10 percent of sales plus a fixed cost of $65,000. The president has

 

announced that the company’s goal is to increase net income by 15 percent. (a) What percentage

 

increase in sales would enable the company to reach its goal? Support your answer with a pro

 

forma income statement. (b) The market may become stagnant next year, and the company does

 

not expect an increase in sales revenue. The production manger believes that an improved

 

production procedure can cut cost of goods sold by 2 percent. What else can the company do to

 

reach its goal? Prepare a pro forma income statement illustrating your proposal. (c) The company

 

decides to escalate its advertising campaign to boost consumer recognition, which will increase

 

selling and administrative expenses to $405,000. With the increased advertising, the company

 

 

 

expects sales revenue to increase by 15 percent. Assume that cost of goods remains a constant

 

proportion of sales. Can the company reach its goal?

 

 

6. Preparing a cash budget – McBride Medical Clinic has budgeted the following cash

 

flows.

 

January

 

February

 

March

 

Cash receipts

 

$101,000

 

$108,000

 

$125,000

 

Cash payments

 

For inventory purchases 92,000

 

72,000

 

83,000

 

For S&A expenses

 

30,000

 

32,000

 

26,000

 

McBride Medical had a cash balance of $7,000 on January1. The company desires to maintain a

 

cash cushion of $5,000. Funds are assumed to be borrowed, in increments of $1,000, and repaid

 

on the last day of each month; the interest rate is 1 percent per month. McBride pays its vendor

 

on the last day of the month also. The company had a $30,000 beginning balance in its line of

 

credit liability account.

 

(a) Prepare a cash budget. (Round all computations to the nearest whole dollar.)

 

 

Paper#6013 | Written in 23-Dec-2015

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