Problem 21-22A Preparing a master budget for a retail company with no beginning account
Unici Company is a retail company that specializes in selling outdoor camping equipment. The company
is considering opening a new store on October 1, 2006. The company president formed a planning
committee to prepare a master budget for the first three months of operation. He assigned you,
the budget coordinator, the following tasks.
a. October sales are estimated to be $120,000 of which 40 percent will be cash and 60 percent will
be credit. The company expects sales to increase at the rate of 25 percent per month. Prepare a
b. The company expects to collect 100 percent of the accounts receivable generated by credit sales in
the month following the sale. Prepare a schedule of cash receipts.
c. The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending
inventory equal to 10 percent of the next months cost of goods sold. Ending inventory at December
31 is expected to be $12,000. Assume that all purchases are made on account. Prepare an inventory
d. The company pays 70 percent of accounts payable in the month of purchase and the remaining 30
percent in the following month. Prepare a cash payments budget for inventory purchases.
e. Budgeted selling and administrative expenses per month follow.
Salary expense (fixed) $18,000
Sales commissions 5 percent of Sales
Supplies expense 2 percent of Sales
Utilities (fixed) $1,400
Depreciation on store equipment (fixed)* $4,000
Rent (fixed) $4,800
Miscellaneous (fixed) $1,200
*The capital expenditures budget indicates that Unici will spend
$164,000 on October 1 for store fixtures, which are expected to have a
$20,000 salvage value and a three-year (36-month) useful life.
Planning for Profit and Cost Control 1045
a. NI: $945,000
c. NI: $1,035,000
Exercise 21-1B Budget responsibility
Ken Chaney, the controller of Oxmoore Industries, Inc., is very popular. He is easygoing and does not
offend anybody. To develop the companys most recent budget, Mr. Chaney first asked all department
managers to prepare their own budgets. He then added together the totals from the department budgets
to produce the company budget. When Sally Khatri, Oxmoores president, reviewed the company
budget, she sighed and asked, Is our company a charitable organization?
Write a brief memo describing deficiencies in the budgeting process and suggesting improvements.
L.O. 1, 2
Use this information to prepare a selling and administrative expenses budget.
f. Utilities and sales commissions are paid the month after they are incurred; all other expenses are
paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative
g. Unici borrows funds, in increments of $1,000, and repays them on the last day of the month. The
company also pays its vendors on the last day of the month. It pays interest of 1 percent per month
in cash on the last day of the month. To be prudent, the company desires to maintain a $12,000
cash cushion. Prepare a cash budget.
h. Prepare a pro forma income statement for the quarter.
i. Prepare a pro forma balance sheet at the end of the quarter.
j. Prepare a pro forma statement of cash flows for the quarter. hide problem
The solution assists in preparing a master budget for the Unici company.