. 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.
Budgeted cost of goods sold $70,000
Plus: Desired ending inventory
Less: Beginning Inventory
Required purchases (on account)$59,400
(a) Complete the inventory purchases budget by filling in the missing amounts.
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.
Section 1: Cash receipts
Beginning cash balance
Add cash receipts
Total cash available (a)
Section 2: Cash payments
For inventory purchases
For S&A expenses
For interest expense
Total budgeted disbursements (b) 217,646
Section (3): Financing activities
Borrowed (repayments) © 5,646
Ending cash balance (a – b + c)
(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.
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:
Cost of goods sold
Selling & admin. Expense
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.
Cost of goods sold
Selling & admin. expenses
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
For inventory purchases 92,000
For S&A expenses
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.)
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