Question

Keggler’s Supply is a merchandiser of three different products. The company’s February 28 inventories are footwear, 18,500 units; sports equipment, 79,500 units; and apparel, 49,500 units. Management believes each of these inventories is too high. As a result, a new policy dictates that ending inventory in any month should equal 31% of the expected unit sales for the following month. Expected sales in units for March, April, May, and June follow.

	Budgeted Sales in Units
	March	April	May	June
Footwear	14,500	23,500	33,500	33,500
Sports equipment	71,000	91,500	95,000	91,000
Apparel	41,000	37,500	33,500	23,000

Required:
1. Prepare a merchandise purchases budget (in units) for each product for each of the months of March, April, and May.

During the last week of August, Oneida Company’s owner approaches the bank for a $106,500 loan to be made on September 2 and repaid on November 30 with annual interest of 16%, for an interest cost of $4,260. The owner plans to increase the store’s inventory by $60,000 during September and needs the loan to pay for inventory acquisitions. The bank’s loan officer needs more information about Oneida’s ability to repay the loan and asks the owner to forecast the store’s November 30 cash position. On September 1, Oneida is expected to have a $4,000 cash balance, $138,600 of net accounts receivable, and $100,000 of accounts payable. Its budgeted sales, merchandise purchases, and various cash disbursements for the next three months follow.

Budgeted Figures*	September		October		November
Sales	$	220,000	$	405,000	$	490,000
Merchandise purchases		235,000		210,000		193,000
Cash payments
Payroll		19,700		21,850		24,800
Rent		12,000		12,000		12,000
Other cash expenses		34,500		31,600		21,000
Repayment of bank loan						106,500
Interest on the bank loan						4,260

*Operations began in August; August sales were $180,000 and purchases were $100,000.

The budgeted September merchandise purchases include the inventory increase. All sales are on account. The company predicts that 23% of credit sales is collected in the month of the sale, 47% in the month following the sale, 19% in the second month, 7% in the third, and the remainder is uncollectible. Applying these percents to the August credit sales, for example, shows that $84,600 of the $180,000 will be collected in September, $34,200 in October, and $12,600 in November. All merchandise is purchased on credit; 80% of the balance is paid in the month following a purchase, and the remaining 20% is paid in the second month. For example, of the $100,000 August purchases, $80,000 will be paid in September and $20,000 in October.

Required:
Prepare a cash budget for September, October, and November. (Round your final answers to the nearest whole dollar.)

Aztec Company sells its product for $170 per unit. Its actual and budgeted sales follow.

	Units	Dollars
April (actual)	4,500	$	765,000
May (actual)	2,200		374,000
June (budgeted)	5,000		850,000
July (budgeted)	4,000		849,000
August (budgeted)	3,800		646,000

All sales are on credit. Recent experience shows that 22% of credit sales is collected in the month of the sale, 48% in the month after the sale, 26% in the second month after the sale, and 4% proves to be uncollectible. The product’s purchase price is $110 per unit. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 24% of the next month’s unit sales plus a safety stock of 160 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,896,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $100,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $100,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. On May 31, the loan balance is $49,500, and the company’s cash balance is $100,000.

Required:
1. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.
2. Prepare a schedule that shows the computation of budgeted ending inventories (in units) for April, May, June, and July.
3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month.
4. Prepare a schedule showing the computation of cash payments for product purchases for June and July.
5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.

Near the end of 2017, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017.

DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017
Assets
Cash	$	35,500
Accounts receivable		520,000
Inventory		100,000
Total current assets				$	655,500
Equipment		588,000
Less: accumulated depreciation		73,500
Equipment, net					514,500
Total assets				$	1,170,000
Liabilities and Equity
Accounts payable	$	370,000
Bank loan payable		14,000
Taxes payable (due 3/15/2018)		92,000
Total liabilities				$	476,000
Common stock		473,000
Retained earnings		221,000
Total stockholders’ equity					694,000
Total liabilities and equity				$	1,170,000

To prepare a master budget for January, February, and March of 2018, management gathers the following information.

The company’s single product is purchased for $20 per unit and resold for $56 per unit. The expected inventory level of 5,000 units on December 31, 2017, is more than management’s desired level, which is 20% of the next month’s expected sales (in units). Expected sales are: January, 7,000 units; February, 9,000 units; March, 11,000 units; and April, 10,500 units.

Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 57% is collected in the first month after the month of sale and 43% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $130,000 is collected in January and the remaining $390,000 is collected in February.

Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31, 2017, accounts payable balance, $70,000 is paid in January and the remaining $300,000 is paid in February.

Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $72,000 per year.

General and administrative salaries are $132,000 per year. Maintenance expense equals $2,200 per month and is paid in cash.

Equipment reported in the December 31, 2017, balance sheet was purchased in January 2017. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $38,400; February, $96,000; and March, $21,600. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full month’s depreciation is taken for the month in which equipment is purchased.

The company plans to buy land at the end of March at a cost of $175,000, which will be paid with cash on the last day of the month.

The company has a working arrangement with its bank to obtain additional loans as needed. The interest rate is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments on these loans can be made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of $19,000 at the end of each month.

The income tax rate for the company is 43%. Income taxes on the first quarter’s income will not be paid until April 15.

Required:
Prepare a master budget for each of the first three months of 2018; include the following component budgets:

1. Monthly sales budgets.
2. Monthly merchandise purchases budgets.
3. Monthly selling expense budgets.
4. Monthly general and administrative expense budgets.
5. Monthly capital expenditures budgets.
6. Monthly cash budgets.
7. Budgeted income statement for the entire first quarter (not for each month).
8. Budgeted balance sheet as of March 31, 2018.