Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 72

Comprehensive Budget; Strategy Gold Sporting Equipment (GSE) is in the process of preparing its budget for the third quarter of 2010. The budgeting staff has gathered the following data:

1. Account balances as of June 30:

Cash	$ 25,000
Accounts receivable	15,000
Short-term payable (equipment purch.)	0
Merchandise inventory	47,520
Building and equipment (net)	200,000
Bank loans pay	0
Income tax payable	0

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2. Recent and forecasted sales:

June (actual)	$ 75,000
July	80,000
August	82,000
September	90,000
October	100,000

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3. Sales are 80 percent cash and 20 percent on credit. Credit accounts are all collected 30 days after sale.

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4. At gross purchase prices of inventories, GSE’s gross margin averages 40 percent of revenues. GSE records all inventory purchases net of available purchase discounts.

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5. Operating expenses: Salaries and wages, $8,000 per month plus 5 percent of revenue; rent and property tax, $1,000 per month; other operating expenses, excluding depreciation, 2 percent of revenues; depreciation $800 per month. All cash operating expenses in a month are paid before the end of the month.

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6. GSE has no minimum inventory requirement. The policy is to purchase each month on the 15th the expected sales (@ cost) for the following month. Terms of purchases are 1/10, n/30. Purchases usually arrive on or before the 20th. GSE’s policy is to take all cash discounts offered.

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7. GSE is negotiating the purchase of new equipment for $127,000 to be installed in September. Terms are 50 percent in the month before and 50 percent after the month of installation.

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8. Minimum cash balance is $30,000. All borrowings are effective at the beginning of the month and all repayments are made at the end of the month of repayment. Loans are repaid when sufficient cash is available. The interest rate is 15 percent per year, payable at the end of each month. Both borrowings and repayments are in multiples of $10,000. Management does not want to borrow any more cash than is necessary and wants to repay whenever the cash on hand exceeds the minimum requirement.

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9. GSE plans to pay no dividend to stockholders.

Required

1. Complete schedules A through E.

Schedule A: Budgeted Monthly Cash Receipts
Item	June	July	August	September
Cash sales
Credit sales
Total sales
Receipts:
Cash sales	N/A
Collections on accounts	N/A
Total cash collections
Schedule B: Budgeted Monthly Cash Disbursements for Purchases
Purchases (gross)	June	July	August	3rd Quarter
Cash discount
Total
Schedule C: Budgeted Monthly Cash Disbursements for Operating Costs
Salaries and wages	June	July	August	3rd Quarter
Rent and property taxes
Other cash operating costs
Total
Schedule D: Budgeted Total Cash Disbursements Prior to Financing
Cash operating costs	June	July	August	3rd Quarter
Purchases
Equipment
Total
Schedule E: Cash Budget
Cash balance, beginning		July	August	3rd Quarter
Total cash receipts
Total cash disbursements prior to financing
Cash balance before financing
Financing:
Borrowing required
Interest expense
Borrowing repaid
Cash balance, ending

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2. Prepare a budgeted income statement for the third quarter and beginning and end-of-quarter balance sheets. GSE estimates its income tax rate at 25 percent, payable in the second quarter of the following year. (Hint: Cost of goods sold % is 59.4%.)

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3. Gold Sporting Equipment has been using the loan described in Item 8 to meet its needs for funds. Alternatively, Gold can issue long-term bonds at no more than 12 percent annual interest rate to increase funds available for operations. What is the most sensible type of loan GSE should use to meet its needs? Explain your reasoning.

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4. The underlying business situation has been greatly simplified. List at least three complicating factors that may exist in a real business setting.

Step 1 of 4

1.?Schedule A: Budgeted Monthly Cash Receipts

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Item	June	July	August	Sept.
Cash sales (80% x sales)	$60,000	$64,000	$65,600	$72,000
Credit sales (20% x sales)	15,000	16,000	16,400	18,000
Total sales	$75,000	$80,000	$82,000	$90,000
Receipts:
Cash sales		$64,000	$65,600	$72,000
Collections on accounts (last month’s
credit sales)		15,000	16,000	16,400
Total cash collections		$79,000	$81,600	$88,400

Schedule B: Budgeted Monthly Cash Disbursements for Purchases

Item	July	August	September	3rd Qtr.
Purchases (@ gross cost)	$49,200	$54,000	$60,000	$163,200
Cash discount (1% of gross cost)	492	540	600	1,632
Net purchases	$48,708	$53,460	$59,400	$161,568

Schedule C: Budgeted Monthly Cash Disbursements for Operating Costs

Item	July	August	September	3rd Qtr.
Salaries and wages	$12,000	$12,100	$12,500	$36,600
Rent&Property Taxes	1,000	1,000	1,000	3,000
Other cash operating costs	1,600	1,640	1,800	5,040
Total	$14,600	$14,740	$15,300	$44,640

Schedule D: Budgeted Cash Disbursements Prior to Financing?

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Item	July	August	September	3rd Qtr.
Cash operating costs	$14,600	$14,740	$15,300	$44,640
Net purchases	48,708	53,460	59,400	161,568
Equipment	-0-	63,500	-0-	63,500
Total	$63,308	$131,700	$74,700	$269,708

Schedule E: Cash Budget

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Item	July	August	September	3rd Qtr.
Cash balance, beginning	$25,000	$40,692	$39,967	$25,000
Total cash receipts	79,000	81,600	88,400	249,000
Cash disbursements prior to financing	63,308	131,700	74,700	269,708
Cash balance before financing	$40,692	($9,408)	$53,667	$4,292
Financing:
Borrowing required	$0	$50,000	$0	$50,000
Interest payment	$0	$625	$625	$1,250
Borrowing repaid	$0	$0	$20,000	$20,000
Net effect of financing	$0	$49,375	($20,625)	$28,750
Cash balance, ending	$40,692	$39,967	$33,042	$33,042
Minimum cash balance required	$30,000	$30,000	$30,000	$30,000
Check for minimum balance	OK	OK	OK	OK