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Master Budget for Victoria Kite

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Prepare Master Budget

Victoria Kit Company, a small Melbourne firm that sells kites on the Web wants a master budget for the next three month, beginning January 1, 2005. It desires and ending minimum cash balance of $5,000 each month. Sales are forecasted at an average wholesale selling price of $8 per kite. In January, Victory Kite is beginning just-in-time (JIT) deliveries from suppliers, which means that purchases equal expected sales.
On January 1 purchases will cease until inventory reaches $6,000, after which time purchases will equal sales. Merchandise costs average $4 per kite. Purchases during any given month are paid in full during the following month. All sales are on credit, payable within 30 days, but experience has shown that 60% of current sales are collected in the current month, 30% in the next month, and 10% in the month thereafter. Bad debts are negligible.
Monthly operating expenses are as follows:

Wages and salaries $15,000
Insurance expired 125
Depreciation 250
Miscellaneous 2,500
Rent $250/month + 10% of quarterly
Sales over $10,000

Cash dividends of $1,500 are to be paid quarterly, beginning January 15, and are declared on the fifteenth of the previous month. All operation expenses are paid as incurred, except insurance, depreciation, and rent. Rent of $250 is paid at the beginning of each month, and the additional 10% of sales is paid quarterly on the tenth of the month following the end of the quarter. The nest settlement is due January 10.
The company plans to buy some new fixtures for $3,000 cash in March.
Money can be borrowed and repaid in multiples of $500 at an interest rate of 10% per annum. Management wants to minimize borrowing and repay rapidly. Interest is computed and paid when the principal is repaid. Assume that borrowing occurs at the beginning, and repayments at the end, of the months in question. Money is never borrowed at the beginning and repaid at the end of the same month. Compute interest to the nearest dollar.

Assets as of Liabilities as of
December 31, 2004 December 31, 2004

Cash $ 5,000 Accounts payable
Accounts receivable 12,500 (merchandise $35,550
Inventory* 39,050 Dividends 1,500
Unexpired insurance 1,500 Rent payable 7,800
Fixed assets, net 12,500 $44,850
$70,550
*November 30 inventory balance = $16,000

Recent and forecasted sales:

October $38,000 December $25,000 February $75,000 April $45,000
November $25,000 January $62,000 March $38,000

Prepare a master budget including a budget income statement, balance sheet, statement of case receipt and disbursement, and supporting schedules for the months January through March 2005

Explain why there is a need for a bank loan and what operating source provide the cash for the repayment of the bank loan.
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How To Prepare a Master Budget for Victoria Kite

Victoria Kite Company sells kits on the web wants a master budget for the next three months beginning January 1, 2005.

1) It desires an ending minimum cash balance of $5,000 each month.

2) Sales forecasted at an average wholesale selling price of $8 per kite.

In January, Victoria Kite is beginning just-in-time (JIT) deliveries from suppliers, which means that purchases equal expected sales

3) On January 1, purchases will cease until inventory reaches $6,000, after which time purchases will equal sales. Merchandise costs average $4 per kite.

4) Purchases during any given month are paid in full during the following month.

5) All sales are on credit, payable within 30 days, but experience has show that:

60% of current sales are collected in the current month,

30% in the next month, and

10% in the month thereafter. Bad debts are negligible.

6) Monthly operating expenses are as follows:

Wages and salaries $15,000

Insurance expired 125

Depreciation 250

Miscellaneous 2,500

Rent 250/month + 10% of quarterly sales over 10,000

7) Cash dividends of $1,500 are to be paid quarterly, beginning January 15, and are declared on the fifteenth of the previous month.

8) All operating expenses are paid as incurred, except insurance, depreciation, and rent.

9) Rent of $250 is paid at the beginning of each month, and the additional 10% of sales is paid quarterly on the tenth of the month following the end of the quarter.

The next settlement is due January 10.

10) The company plans to buy some new fixtures for $3,000 cash in March.

11) Money can be borrowed and repaid in multiples of $500 at an interest rate of 10% per annum.

Management wants to minimize borrowing and repay rapidly. Interest is computed and paid when the principal is repaid.

11A) Assume that borrowing occurs at the beginning, and repayments at the end of the month s in questions.

11B) Money is never borrowed at the beginning and repaid at the end of the same month. Compute interest to the nearest dollar.

12) Assets as of December 31,2004

Cash $5,000

Accounts receivable 12,500

Inventory * 39,050

Un-expired insurance 1,500

Fixed assets, net 12,500

Total $70,550

13) Liabilities as of December 31, 2004

Accounts payable (merchandise) $35,550

Dividends payable 1,500

Rent payable 7,800

Total $44,850

14) November 30 inventory balance = $16,000

15) Recent and forecasted sales

October $38,000

November $25,000

December $25,000

January $62,000

February $75,000

March $38,000

April $45,000

Required:

(1) Prepare a master budget including a

Budgeted income statement for the months January through March 2005
Budgeted balance sheet for the months January through March 2005
Budgeted statement of cash receipts and disbursements for the months January through March 2005
Supporting schedules for the months January through March 2005

(2) Explain why there is a need for a bank loan and what operating sources provide the cash for repayment of the bank loan.

Instructions for requirement #1

(1) Prepare a master budget including a

Budgeted income statement for the months January through March 2005
Budgeted balance sheet for the months January through March 2005
Budgeted statement of cash receipts and disbursements for the months January through March 2005
Supporting schedules for the months January through March 2005

First do the schedules

Schedule a: Sales Budget

January February March

Total sales (100% on credit)

Schedule b: Cash Collections

January February March

60% of current month's sales

30% of previous month's sales

10% of second previous month's sales

Total collections

Schedule c: Purchases Budget

December January February March

Desired ending inventory

Cost of goods sold

Total needed

Beginning inventory

Purchases

Schedule d: Disbursements

January February March for Purchases

100% of previous month's purchases $ $ - $

Exhibit I

VICTORIA KITE

Budgeted Statement of Cash Receipts and Disbursements

For the Three Months Ending March 31, 2005

January February March

Cash balance, beginning

Minimum cash balance desired

(a) Available cash balance

Cash receipts and disbursements:

Collections from customers

Payments for merchandise

Rent
Wages and salaries

Miscellaneous expenses
Dividends

Purchase of fixtures

(b) Net cash receipts & disbursements

Excess (deficiency) of cash before

financing (a + b).

Financing:

Borrowing, at beginning of period

Repayment, at end of period
Interest, 10% per annum

(c) Total cash increase (decrease)

from financing

(d) Cash balance, end (beginning

balance + c + b)

Exhibit II

VICTORIA KITE

Budgeted Income Statement

For the Three Months Ending March 31, 2005

Sales

Cost of goods sold

Gross margin

Operating expenses:

Rent
Wages and salaries

Depreciation.

Insurance

Miscellaneous

Net income from operations

Interest expense

Net income

Exhibit III

VICTORIA KITE

Budgeted Balance Sheet

March 31, 2005

Assets

Current assets:

Cash (Exhibit I)

Accounts receivable*

Merchandise inventory

Un-expired insurance

Fixed assets, net
Total assets

Liabilities and Stockholders' Equity

Liabilities:

Accounts payable (Schedule d)

Rent payable.

Dividends payable

Stockholders' equity (1)

Total liabilities and stockholders' equity.

(1) Balance, December 31, 2004

Add: Net income.

Total

Less: Dividends declared.

Balance, March 31, 2005

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