Geme Cost

1: ABC Company’s newly hired accountant has persuaded management to prepare a master
budget to aid financial and operating decisions. The planning horizon is only three months,
January to March. Sales in December (20x3) were Br. 75, 000. Monthly sales for the first
four months of the next year (20x4) are forecasted as follows:
January Br. 70, 000
February 90, 000
March 80, 000
April 60, 000
Normally 70% of sales are on cash and the remainders are credit sales. All credit sales are
collected in the month following the sales. Uncollectible accounts are negligible and are to be
ignored. Because deliveries from suppliers and customer demand are uncertain, at the end of
any month ABC wants to have a basic inventory of Br. 15, 000 plus 70% of the expected cost
of goods to be sold in the following month. The cost of merchandise sold averages 75%of
sales. The purchase terms available to the company are net 30 days. Each month’s purchase
are paid as follows:
60% during the month of purchase and,
40% during the month following the purchases
Monthly expenses are:
Wages and commissions…………………Br. 2, 000 + 10%of sales, paid as incurred.
Rent expense………………………………………..Br. 1, 000 paid as incurred.
Insurance expense…………………………………..Br.400 expiration per month
Depreciation including truck……………………….Br.500 per month
Miscellaneous expense…………………………….6% of sales, paid as incurred.
In January, a used truck will be purchased for Br. 4, 000 cash. The company wants a
minimum cash balance of Br. 10, 000 at the end of each month. Blue Nile can borrow cash or
repay loans in multiples of Br. 1, 000. Management plans to borrow cash more than necessary
and to repay as promptly as possible. Assume that the borrowing takes place at the beginning,
and repayment at the end of the months in question. Interest is paid when the related loan is
repaid. The interest rate is 18% per annum. The closing balance sheet for the fiscal year just
ended at December 31, 20x3,is:
ABC Company
Balance Sheet
December 31, 20x3
ASSETS
Current assets:
Cash Br. 10, 000

Account receivable 17,500
Merchandise inventory 48, 000
Unexpired insurance 1, 800
Total Br.77,300
Plant assets:
Equipment, fixture and other Br.37, 000
Accumulated depreciation 12, 800
Total Br. 24, 200
Total assets Br.101,500
LIABILITIES AND OWNERS’ EQUITY
Liabilities:
Accounts payable Br.16, 800
Accrued wages and commissions payable 4, 250
Total Br. 21, 050
Capital:
Owners’ equity Br. 80, 450
Total liabilities and owners’ equity Br. 101,500
Instructions:
1) Using the data given above, prepare the following detailed schedules for the first quarter
of the year:
a) Sales budget
b) Cash collection budget
c) Purchase budget
d) Disbursement for purchases
e) Operating expenses budget
f) Disbursement for operating expenses
2) Using the budget data given above and the schedules you have prepared, construct the
following pro forma financial statements
a. Income statement for the first quarter of the year.
b. Cash budget including receipts, payments, and effect of financing
c. Balance sheet at March 31, 20x3.
STEPS IN PREPARATION OF MASTER BUDGET
1. a) Sales budget
December* January February March Jan.-Mar.

Total
Cash sales (70%) Br.52, 500 Br.49, 000 Br.63, 000 Br.56, 000 Br.168,0000
Credit sales (30%) 22, 500 21, 000 27, 000 24,000 72,000
Totals Br.75, 000 Br.70, 000 Br.90, 000 Br.80, 000 Br.240,000
*December sales are included in the schedule (a) because they affect cash collected in
January
b) Cash collection budget
January February March Jan - Mar

Cash sales of the month Br. 49, 000 Br.63, 000 Br.56, 000
Credit sales of last 22, 500 21, 000 27, 000
month
Total cash collected Br.71, 500 Br.84, 000 Br. 83, 000 218,500
a) Purchase budget
January February March Jan.-Mar

Required ending inventory Br.62,250 Br.57,000 Br.46,500
Cost of gods sold 52,500 67,500 60 ,000 Br.180,000
Total needed Br.114,750 Br.124,500 Br. 106,500
Beginning inventory 48,000 62,250 57,000
Purchases budget Br. 66,750 Br. 62,250 Br. 49,500 178,500
b) Disbursement for purchases
January February March Jan- Mar

60% of last month’s purchase Br.16, 800 Br. 40,050 Br.37,350
40% of current month’s 26,700 24,900 19,800
purchase
Total disbursement for Br.43,500 Br.64,950 Br.57,150 Br.165,600
purchase
c) Operating expense budget

January February March Jan.-Mar.
Wages and commissions Br. 9, 000 Br.11,000 Br.10,000 Br.30, 000
Rent expense 1, 000 1, 000 1, 000 3, 000
Insurance expense 400 400 400 1,200
Depreciation expense 500 500 500 1, 500
Miscellaneous expense 4,200 5,400 4,800 14, 400
Total Br.15,100 Br.18,300 Br.16,700 Br.50,100
d) Disbursement for operating expenses budget
January February March

Wages and commissions Br. 13,250 Br.11,000 Br.10,000
Rent expense 1, 000 1, 000 1, 000
Miscellaneous expense 4,200 5, 400 4, 800
Total Br.18, 450 Br.17, 400 Br.15, 800
2. a ) Budget income statement
ABC Company
Budget Income Statement
For the Quarter Ended, March 31, 20x3
Sales (schedule 1(a)) Br. 240,000

Cost of goods sold (schedule 1(c)) Br. 180,000
Gross profit Br. 60,000
Operating expenses
Wages and commissions Br.30, 000
Rent expense 3, 000
Insurance expense 1, 200
Depreciation expense 1,500
Miscellaneous expense 14, 400
Total Br. 50,100
Operating income 9,900
Interest expense* 885
Net income 10,785
*Interest expense computation

Paid interest = 11, 000´3/12= 495
Accrued amount:
On the first batch borrowing:
8, 000´0.18´3/12= 360
On the second batch borrowing:
1, 000´0.18´2/12= 30
Total interest expense incurred Br.885
b) Cash budget including receipts, payments and effects of financing
January February March

Beginning balance Br.10, 000 Br.10, 550 Br.10, 750
Collections (Schedule1 (b)) 71, 500 84, 000 83, 000
Cash available for the use (x) Br. 81, 500 Br.94, 550 Br.93, 750
Cash disbursements for:
Purchases (Schedule 1(d)) 43,500 64,950 57,150
Operating expenses (Schedule1 (f)) 18, 450 17, 400 15, 800
Truck purchases 4, 000 - -
Total disbursement (y) Br.65,950 Br. 82,350 Br. 72,950
Minimum cash balance required 10, 000 10, 000 10, 000
Total cash needed Br.75,950 Br.92,350 Br.82,950
Cash excess (deficiency) Br. 5,550 Br. 2,200 Br.(9,200)
Effects of financing
Borrowing 19,000 1,000 -
Payment of the principal - - (11,000)
Payment of interest - - (495)
Net effect of financing (z) Br. 19,000 Br. 1,000 Br.( 11,495)
End cash balance (x+z-y) Br. 34,550 Br. 13,200 Br. 9,305
c) Budgeted balance sheet

ABC Company
Budgeted Balance Sheet
March 31, 20x3 103,600
ASSETS
Current assets
Cash Br. 9,305
Accounts receivable 19,000
Merchandise inventory 46,500
Unexpired insurance 600
Total Br. 75,405
Plant assets
Equipment, Fixture and others Br. 41, 000
Accumulated depreciation Br. 14, 300
Total Br. 26, 700
Total assets Br. 102,105
LIABILITIES AND OWNER’S EQUITY

Liabilities
Accounts payable Br. 29,700
Loan payable 9, 000
Interest payable 390
Checks paid exceeding cash 28,220
Total liabilities Br. 10,870
Capital
Beginning owners’ equity Br.80, 450
Net income Br. 10,785
Ending capital balance Br. 91,235
Total equities Br. 102,105

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1: ABC Company’s newly hired accountant has persuaded management to prepare a master

Cash Br. 10, 000

STEPS IN PREPARATION OF MASTER BUDGET

December* January February March Jan.-Mar.

January February March Jan - Mar

January February March Jan.-Mar

b) Disbursement for purchases

January February March Jan- Mar

c) Operating expense budget

d) Disbursement for operating expenses budget

January February March

2. a ) Budget income statement

Sales (schedule 1(a)) Br. 240,000

*Interest expense computation

b) Cash budget including receipts, payments and effects of financing

January February March

c) Budgeted balance sheet

LIABILITIES AND OWNER’S EQUITY

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