Accounting Question

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings

to various retail outlets located in shopping malls across the country. In the past, the company has done
very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the
upcoming second quarter in order to show management the benefits that can be gained from an
integrated budgeting program. To this end, you have worked with accounting and other areas to gather
the information assembled below.
The company sells many styles of earrings, but all are sold for the same price$10 per pair. Actual sales
of earrings for the last three months and budgeted sales for the next six months follow (in pairs of
earrings):
The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be
on hand at the end of each month to supply 40% of the earrings sold in the following month.
Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of
purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and
payable within 15 days. The company has found, however, that only 20% of a month’s sales are
collected in the month of sale. An additional 70% is collected in the following month, and the remaining
10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment
during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter,
payable in the first month of the following quarter.

A listing of the company’s ledger accounts as of March 31 is given below:
The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a
month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of $1,000
at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we
will assume that interest is not compounded. At the end of the quarter, the company would pay the
bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of
$1,000), while still retaining at least $50,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30 using Excel spreadsheet (You are
required to include the formula in your spreadsheet for any numbers calculated). Include the following
detailed budgets:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in
total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in
total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be
needed to maintain the minimum cash balance of $50,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution
approach.