Master Budgets Chapter 22 2015 Pearson Education Limited

Learning Objectives 1. Describe budgeting objectives, benefits, and procedures and how human behavior influences budgeting 2. Define budget types and the components of the master budget © 2015 Pearson Education, Limited. 22 -2

Learning Objectives 3. Prepare an operating budget for a manufacturing company 4. Prepare a financial budget for a manufacturing company 5. Describe how information technology can be used in the budgeting process © 2015 Pearson Education, Limited. 22 -3

Learning Objectives 6. Prepare an operating budget for a merchandising company (Appendix 22 A) 7. Prepare a financial budget for a merchandising company (Appendix 22 A) © 2015 Pearson Education, Limited. 22 -4

Learning Objective 1 Describe budgeting objectives, benefits, and procedures and how human behavior influences

Budgeting Objectives © 2015 Pearson Education, Limited. 22 -6

Benefits of Budgeting • Requires managers to plan • Promotes coordination and communication •

Performance Report Exhibit 22 -2 Performance Report SERVICE COMPANY Income Statement Performance Report For the Month Ended May 31, 2016 Actual Budget Number of Services Sold 19, 000 20, 000 Service Revenue $ 589, 000 $ 600, 000 Variable Expenses: Server Space Expense 38, 000 45, 000 Advertising Expense 29, 450 30, 000 Total Variable Expenses 67, 450 75, 000 Contribution Margin 521, 550 525, 000 Fixed Expenses: Salary Expenses 20, 000 Internet Access Expense 18, 000 Total Fixed Expenses 38, 000 Operating Income $ 483, 550 $ 487, 000 © 2015 Pearson Education, Limited. Variance (1, 000) $ (11, 000) (7, 000) (550) (7, 550) (3, 450) $ 0 0 0 (3, 450) 22 -8

Budgeting Procedures • Vary from company to company • Should include input from all levels • Usually begins several months before the beginning of the budget period © 2015 Pearson Education, Limited. 22 -9

How Managers Motivate Employees to Accept the Budget’s Goals • Managers must support the budget themselves, or no one else will. • Managers must show employees how budgets can help them achieve better results. • Managers must have employees participate in developing the budget so that employees feel the goals are realistic and achievable. © 2015 Pearson Education, Limited. 22 -10

Budgetary Games • Budgetary slack • Spend it or lose it © 2015 Pearson

>TRY IT! Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, acting, controlling, coordinating and communicating, and benchmarking. 1. Managers are required to think about future business activities. © 2015 Pearson Education, Limited. 22 -12

>TRY IT! Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, acting, controlling, coordinating and communicating, and benchmarking. 1. Managers are required to think about future business activities. Planning © 2015 Pearson Education, Limited. 22 -13

>TRY IT! Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, acting, controlling, coordinating and communicating, and benchmarking. 2. Managers use feedback to identify corrective action. © 2015 Pearson Education, Limited. 22 -14

>TRY IT! Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, acting, controlling, coordinating and communicating, and benchmarking. 2. Managers use feedback to identify corrective action. Controlling © 2015 Pearson Education, Limited. 22 -15

>TRY IT! Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, acting, controlling, coordinating and communicating, and benchmarking. 3. Managers use results to evaluate employees’ performance. © 2015 Pearson Education, Limited. 22 -16

>TRY IT! Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, acting, controlling, coordinating and communicating, and benchmarking. 3. Managers use results to evaluate employees’ performance. Benchmarking © 2015 Pearson Education, Limited. 22 -17

>TRY IT! Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, acting, controlling, coordinating and communicating, and benchmarking. 4. Managers work with managers in other divisions. © 2015 Pearson Education, Limited. 22 -18

>TRY IT! Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, acting, controlling, coordinating and communicating, and benchmarking. 4. Managers work with managers in other divisions. Coordinating and communicating © 2015 Pearson Education, Limited. 22 -19

Learning Objective 2 Define budget types and the components of the master budget ©

Types of Budgets • Strategic and operational budgets • Static and flexible budgets •

Master Budget Components Exhibit 22 -3 Master Budget Components Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Operating Budget Cost of Goods Sold Budget Selling and Administrative Expense Budget Capital Expenditures Budget Cash Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows Financial Budget © 2015 Pearson Education, Limited. 22 -22

>TRY IT! Match the budget types to the definitions. Budget Types Definitions 5. Financial a. Includes sales, production, and cost of goods sold budgets 6. Flexible b. Long-term budgets 7. Operating c. Includes one level of sales volume 8. Operational d. Includes various levels of sales volumes 9. Static e. Short-term budgets 10. Strategic f. Includes the budgeted financial statements © 2015 Pearson Education, Limited. 22 -23

>TRY IT! Match the budget types to the definitions. Budget Types Definitions 5. Financial a. Includes sales, production, and cost of goods sold budgets 6. Flexible b. Long-term budgets 7. Operating c. Includes one level of sales volume 8. Operational d. Includes various levels of sales volumes 9. Static e. Short-term budgets 10. Strategic f. Includes the budgeted financial statements © 2015 Pearson Education, Limited. 22 -24

>TRY IT! Match the budget types to the definitions. Budget Types Definitions 5. Financial a. Includes sales, production, and cost of goods sold budgets 6. Flexible b. Long-term budgets 7. Operating c. Includes one level of sales volume 8. Operational d. Includes various levels of sales volumes 9. Static e. Short-term budgets 10. Strategic f. Includes the budgeted financial statements © 2015 Pearson Education, Limited. 22 -25

>TRY IT! Match the budget types to the definitions. Budget Types Definitions 5. Financial a. Includes sales, production, and cost of goods sold budgets 6. Flexible b. Long-term budgets 7. Operating c. Includes one level of sales volume 8. Operational d. Includes various levels of sales volumes 9. Static e. Short-term budgets 10. Strategic f. Includes the budgeted financial statements © 2015 Pearson Education, Limited. 22 -26

>TRY IT! Match the budget types to the definitions. Budget Types Definitions 5. Financial a. Includes sales, production, and cost of goods sold budgets 6. Flexible b. Long-term budgets 7. Operating c. Includes one level of sales volume 8. Operational d. Includes various levels of sales volumes 9. Static e. Short-term budgets 10. Strategic f. Includes the budgeted financial statements © 2015 Pearson Education, Limited. 22 -27

>TRY IT! Match the budget types to the definitions. Budget Types Definitions 5. Financial a. Includes sales, production, and cost of goods sold budgets 6. Flexible b. Long-term budgets 7. Operating c. Includes one level of sales volume 8. Operational d. Includes various levels of sales volumes 9. Static e. Short-term budgets 10. Strategic f. Includes the budgeted financial statements © 2015 Pearson Education, Limited. 22 -28

>TRY IT! Match the budget types to the definitions. Budget Types Definitions 5. Financial a. Includes sales, production, and cost of goods sold budgets 6. Flexible b. Long-term budgets 7. Operating c. Includes one level of sales volume 8. Operational d. Includes various levels of sales volumes 9. Static e. Short-term budgets 10. Strategic f. Includes the budgeted financial statements © 2015 Pearson Education, Limited. 22 -29

Learning Objective 3 Prepare an operating budget for a manufacturing company © 2015 Pearson

Balance Sheet Exhibit 22 -4 Balance Sheet SMART TOUCH LEARNING Balance Sheet December 31, 2016 Assets Current Assets: Cash $ 15, 000 Accounts Receivable 70, 000 Raw Materials Inventory 30, 000 Finished Goods Inventory 55, 000 Total Current Assets $ Property, Plant, and Equipment: Equipment 210, 340 Less: Accumulated Depreciation (12, 000) Total Assets $ Liabilities Current Liabilities: Accounts Payable $ Stockholders' Equity Common Stock, no par $ 300, 000 Retained Earnings 48, 340 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ © 2015 Pearson Education, Limited. 170, 000 198, 340 368, 340 20, 000 348, 340 368, 340 22 -31

Data for the Sales Budget • Will sell 500 tablet computers in the first quarter • Sales will increase by 50 tablets each quarter • The tablets sell for $500 each © 2015 Pearson Education, Limited. 22 -32

Sales Budget Exhibit 22 -5 Sales Budget SMART TOUCH LEARNING Sales Budget For the Year Ended December 31, 2017 First Second Quarter Budgeted tablets to be sold 500 550 Sales price per unit × $500 Total sales $ 250, 000 $275, 000 Third Quarter 600 × $500 $300, 000 © 2015 Pearson Education, Limited. Fourth Quarter 650 × $500 $325, 000 Total 2, 300 × $500 $ 1, 150, 000 22 -33

Calculation of Budgeted Tablets to be Produced Budgeted tablets to be sold + Desired tablets in ending inventory Total tablets needed − Tablets in beginning inventory Budgeted tablets to be produced © 2015 Pearson Education, Limited. 22 -34

Data for the Production Budget • Finished Goods Inventory balance, $55, 000 (see December 31, 2016 balance sheet in Exhibit 224), which consists of 200 tablets at a cost of $275 each • Desired ending inventory = 20% of the next quarter’s sales • Projected tablets sales in the first quarter of 2018 is 700 tablets (50 tablets more than fourth quarter 2017) © 2015 Pearson Education, Limited. 22 -35

Calculations for Desired Ending Inventory First Quarter: Second quarter’s sales × 20% = Desired ending inventory Second Quarter: Third quarter’s sales × 20% = Desired ending inventory Third Quarter: Fourth quarter’s sales × 20% = Desired ending inventory Fourth Quarter: First quarter’s sales (2018) × 20% = Desired ending inventory © 2015 Pearson Education, Limited. 22 -36

Calculations for Desired Ending Inventory First Quarter: Second quarter’s sales × 20% = Desired ending inventory 550 tablets × 20% = 110 tablets Second Quarter: Third quarter’s sales × 20% = Desired ending inventory 600 tablets × 20% = 120 tablets Third Quarter: Fourth quarter’s sales × 20% = Desired ending inventory 650 tablets × 20% = 130 tablets Fourth Quarter: First quarter’s sales (2018) × 20% = Desired ending inventory 700 tablets × 20% = 140 tablets © 2015 Pearson Education, Limited. 22 -37

Production Budget Exhibit 22 -6 Production Budget SMART TOUCH LEARNING Production Budget For the Year Ended December 31, 2017 First Second Third Quarter Budgeted tablets to be sold 500 550 600 Plus: Desired tablets in ending inventory 110 120 130 Total tablets needed 610 670 730 Less: Tablets in beginning inventory 200 110 120 Budgeted tablets to be produced 410 560 610 © 2015 Pearson Education, Limited. Fourth Quarter 650 140 790 130 660 Total 2, 300 140 2, 440 200 2, 240 22 -38

Calculation of Amount of Material to be Purchased Budgeted tablets to be produced × Direct materials cost per unit Direct materials needed for production + Desired direct materials in ending inventory Total direct materials needed − Direct materials in beginning inventory Budgeted purchases of direct materials © 2015 Pearson Education, Limited. 22 -39

Data for the Direct Materials Budget • Raw Materials Inventory balance, $30, 000 (see the December 31, 2016, balance sheet in Exhibit 22 -4) • Desired ending Raw Materials Inventory = 40% of the next quarter’s production needs • Desired ending balance for the fourth quarter, $42, 600. • Cost of direct materials is $150 per unit. © 2015 Pearson Education, Limited. 22 -40

Calculations for Desired Ending Inventory First Quarter: 2 nd quarter’s production × $150 per unit × 40% = Desired ending inventory Second Quarter: 3 rd quarter’s production× $150 per unit × 40% = Desired ending inventory Third Quarter: 4 th quarter’s production × $150 per unit × 40% = Desired ending inventory Fourth Quarter: Amount given © 2015 Pearson Education, Limited. = Desired ending inventory 22 -41

Calculations for Desired Ending Inventory First Quarter: 2 nd quarter’s production × $150 per unit × 40% = Desired ending inventory 560 tablets × $150 per unit × 40% = $33, 600 Second Quarter: 3 rd quarter’s production× $150 per unit × 40% = Desired ending inventory 610 tablets × $150 per unit × 40% = $36, 600 Third Quarter: 4 th quarter’s production × $150 per unit × 40% = Desired ending inventory 660 tablets × $150 per unit × 40% = $39, 600 Fourth Quarter: Amount given © 2015 Pearson Education, Limited. = Desired ending inventory = $42, 600 22 -42

Direct Materials Budget Exhibit 22 -7 Direct Materials Budget SMART TOUCH LEARNING Direct Materials Budget For the Year Ended December 31, 2017 First Quarter Budgeted tablets to be produced 410 Direct materials cost per unit × $ 150 × Direct materials needed for production $ 61, 500 Plus: Desired direct materials in ending inventory 33, 600 Total direct materials needed 95, 100 Less: Direct materials in beginning inventory 30, 000 Budgeted purchases of direct materials $ 65, 100 Second Quarter 560 $ 150 × $ 84, 000 36, 600 120, 600 33, 600 $ 87, 000 © 2015 Pearson Education, Limited. Third Quarter 610 $ 150 × $ 91, 500 39, 600 131, 100 36, 600 $ 94, 500 Fourth Quarter Total 660 2, 240 $ 150 × $ 150 $ 99, 000 $ 336, 000 42, 600 141, 600 378, 600 39, 600 30, 000 $ 102, 000 $ 348, 600 22 -43

Data for the Direct Labor Budget • Each tablet computer will require three hours

Direct Labor Budget Exhibit 22 -8 Direct Labor Budget SMART TOUCH LEARNING Direct Labor Budget For the Year Ended December 31, 2017 First Second Third Quarter Budgeted tablets to be produced 410 560 610 Direct labor hours per unit × 3 × 3 Direct labor hours needed for production 1, 230 1, 680 1, 830 Direct labor cost per hour × $ 25 × Budgeted direct labor cost $ 30, 750 $ 42, 000 $ 45, 750 © 2015 Pearson Education, Limited. Fourth Quarter Total 660 2, 240 × 3 1, 980 6, 720 $ 25 × $ 25 $ 49, 500 $ 168, 000 22 -45

Data for the Manufacturing Overhead Budget • Variable manufacturing cost, $20 per tablet • Projected fixed costs are: – $12, 000 per quarter for depreciation on the manufacturing equipment – $15, 440 per quarter for other fixed costs • Direct labor hours are used as the allocation base © 2015 Pearson Education, Limited. 22 -46

Predetermined Overhead Allocation Rate Predetermined Total estimated overhead costs Overhead = Total estimated quantity of the overhead allocation base Allocation Rate © 2015 Pearson Education, Limited. 22 -47

Manufacturing Overhead Budget Exhibit 22 -9 Manufacturing Overhead Budget SMART TOUCH LEARNING Manufacturing Overhead Budget For the Year Ended December 31, 2017 First Second Third Fourth Quarter Total 410 560 610 660 2, 240 × $ 20 × $ 20 $ 8, 200 $ 11, 200 $ 12, 200 $ 13, 200 $ 44, 800 Budgeted tablets to be produced VOH* cost per tablet Budgeted VOH Budgeted FOH** Depreciation Utilities, insurance, property taxes Total budgeted FOH Budgeted manufacturing overhead costs $ Direct labor hours (DLHr) Budgeted manufacturing overhead costs Predetermined overhead allocation rate ($154, 560 / 6, 720 DLHr) 12, 000 15, 440 27, 440 35, 640 1, 230 12, 000 $ 27, 440 38, 640 1, 680 $ 12, 000 15, 440 27, 440 39, 640 1, 830 $ 12, 000 15, 440 27, 440 40, 640 48, 000 61, 760 109, 760 $ 154, 560 1, 980 6, 720 $ 154, 560 $ 23 *VOH—Variable Manufacturing Overhead **FOH—Fixed Manufacturing Overhead © 2015 Pearson Education, Limited. 22 -48

Total Projected Manufacturing Cost per Tablet Direct materials cost per tablet $ 150 Direct labor cost per tablet (3 DLHr per tablet × $25 per DLHr) 75 Manufacturing overhead cost per tablet (3 DLHr per tablet × $23 per DLHr) 69 Total projected manufacturing cost per tablet for 2017 $ 294 © 2015 Pearson Education, Limited. 22 -49

Cost of Goods Sold Budget Exhibit 22 -10 Cost of Goods Sold Budget SMART TOUCH LEARNING Cost of Goods Sold Budget For the Year Ended December 31, 2017 First Second Quarter $ 55, 000 Beginning inventory, 200 tablets Tablets produced and sold in 2017 @ $294 each (300, 550, 600, 650 tablets per quarter) Total budgeted cost of goods sold $ 88, 200 $ 143, 200 $ 161, 700 $ © 2015 Pearson Education, Limited. Third Quarter 176, 400 $ Fourth Quarter Total $ 55, 000 191, 100 $ 617, 400 672, 400 22 -50

Smart Touch Learning’s Projected Selling and Administrative Costs for 2017 Salaries Expense, fixed Rent Expense, fixed $ 30, 000 per quarter 25, 000 per quarter Insurance Expense, fixed 2, 500 per quarter Depreciation Expense, fixed 1, 500 per quarter Supplies Expense, variable 1% of Sales Revenue © 2015 Pearson Education, Limited. 22 -51

Projected Supplies Expense = Sales Revenue for × 1% each quarter Quarter Sales Revenue Supplies Expense First $ 250, 000 $ 2, 500 Second 275, 000 2, 750 Third 300, 000 3, 000 Fourth 325, 000 3, 250 © 2015 Pearson Education, Limited. 22 -52

Selling and Administrative Expense Budget Exhibit 22 -11 Selling and Administrative Expense Budget SMART TOUCH LEARNING Selling and Administrative Expense Budget For the Year Ended December 31, 2017 First Quarter Salaries Expense $ 30, 000 Rent Expense 25, 000 Insurance Expense 2, 500 Depreciation Expense 1, 500 Supplies Expense 2, 500 Total budgeted S&A expense $ 61, 500 Second Third Quarter $ 30, 000 25, 000 2, 500 1, 500 2, 750 3, 000 $ 61, 750 $ 62, 000 © 2015 Pearson Education, Limited. Fourth Quarter Total $ 30, 000 $ 120, 000 25, 000 100, 000 2, 500 10, 000 1, 500 6, 000 3, 250 11, 500 $ 62, 250 $ 247, 500 22 -53

>TRY IT! 11. Kendall Company projects 2015 first quarter sales to be $10, 000 and increase by 5% per quarter. Determine the projected sales for 2015 by quarter and in total. Round answers to the nearest dollar. © 2015 Pearson Education, Limited. 22 -54

>TRY IT! 11. First quarter: $ Second quarter: $10, 000 × 1. 05 = Third quarter: $10, 500 × 1. 05 = Fourth quarter: $11, 025 × 1. 05 = Total: $ © 2015 Pearson Education, Limited. 10, 000 10, 500 11, 025 11, 576 43, 101 22 -55

>TRY IT! 12. Friedman Company manufactures and sells bicycles. A popular model is the XC. The company expects to sell 1, 500 XCs in 2014 and 1, 800 XCs in 2015. At the beginning of 2014, Friedman has 350 XCs in Finished Goods Inventory and desires to have 10% of the next year’s sales available at the end of the year. How many XCs will Friedman need to produce in 2014? © 2015 Pearson Education, Limited. 22 -56

>TRY IT! 12. Budgeted XCs to be sold Plus: Desired XCs in ending inventory Total XCs needed Less: XCs in beginning inventory Budgeted XCs to be produced © 2015 Pearson Education, Limited. 1, 500 180 1, 680 350 1, 330 22 -57

Learning Objective 4 Prepare a financial budget for a manufacturing company © 2015 Pearson

Smart Touch Learning’s 2017 Capital Expenditures Budget • Smart Touch Learning plans to purchase additional manufacturing equipment on January 2, 2017. • The equipment will cost $160, 000 and will be paid in two equal installments during the first and second quarters of 2017. © 2015 Pearson Education, Limited. 22 -59

Financial Budget • Cash budget • Budgeted financial statements – Budgeted income statement –

Sections of the Cash Budget • Cash receipts • Cash payments • Short-term financing

Data for Calculating Cash Receipts • 30% of each quarter’s sales will be cash sales • 70% of the sales are expected to be on account – 60% collected in the quarter of the sale – 40% collected in the quarter following the sale • Bad debt expense is not significant • Accounts Receivable balance, $70, 000 (see the December 31, 2016, balance sheet in Exhibit 224) is expected to be collected in the first quarter of 2017 © 2015 Pearson Education, Limited. 22 -62

Cash Receipts from Customers Exhibit 22 -12 Cash Receipts from Customers First Quarter $ 250, 000 Total sales (from Sales Budget, Exhibit 22 -5) Second Quarter $ 275, 000 First Quarter Cash Receipts from Customers: Accounts Receivable balance, December 31, 2016 1 st Qtr. – Cash sales (30%) 1 st Qtr. – Credit sales (70%), 60% collected in 1 st qtr. 1 st Qtr. – Credit sales (70%), 40% collected in 2 nd qtr. 2 nd Qtr. – Cash sales (30%) 2 nd Qtr. – Credit sales (70%), 60% collected in 2 nd qtr. 2 nd Qtr. – Credit sales (70%), 40% collected in 3 rd qtr. 3 rd Qtr. – Cash sales (30%) 3 rd Qtr. – Credit sales (70%), 60% collected in 3 rd qtr. 3 rd Qtr. – Credit sales (70%), 40% collected in 4 th qtr. 4 th Qtr. – Cash sales (30%) 4 th Qtr. – Credit sales (70%), 60% collected in 4 th qtr. Total cash receipts from customers Accounts Receivable balance, December 31, 2017: 4 th Qtr. – Credit sales (70%), 40% collected in 1 st qtr. 2018 $ Third Quarter $ 300, 000 Second Quarter Fourth Quarter $ 325, 000 Third Quarter Fourth Quarter Total 1, 150, 000 Total 70, 000 75, 000 105, 000 $ 70, 000 82, 500 115, 500 $ 77, 000 90, 000 126, 000 $ $ $ 250, 000 $ 268, 000 $ 91, 000 © 2015 Pearson Education, Limited. $ 293, 000 $ 84, 000 97, 500 136, 500 318, 000 $ 1, 129, 000 22 -63

Cash Payments • Capital expenditures • Product costs – Direct materials purchases – Direct labor costs – Manufacturing overhead costs • Selling and administrative expenses © 2015 Pearson Education, Limited. 22 -64

Data for Calculating Cash Payments for Direct Materials • All direct materials purchases are on account – 75% paid in the quarter of the purchase – 25% paid in the quarter following the purchase • Accounts Payable balance, $20, 000 (see the December 31, 2016, balance sheet in Exhibit 224) will be paid in the first quarter of 2017 © 2015 Pearson Education, Limited. 22 -65

Cash Payments © 2015 Pearson Education, Limited. 22 -66

Data for Short-Term Financing • $30, 000 minimum cash balance • Borrowings are made at the beginning of each quarter in increments of $1, 000 • Interest is paid on any outstanding principal balance at the beginning of the following quarter at 3% per quarter • Repayments on the principal balance are made at the beginning of the quarter in increments of $1, 000 © 2015 Pearson Education, Limited. 22 -67

Cash Budget—First Quarter, Before Short -Term Financing Calculations Exhibit 22 -14 Cash Budget—First Quarter, Before Short-Term Financing Calculations SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 Beginning cash balance First Quarter $ 15, 000 Cash receipts 250, 000 Cash available 265, 000 Cash payments: Capital expenditures Second Quarter Third Quarter Fourth Quarter 268, 000 293, 000 318, 000 $ Total 15, 000 1, 129, 000 1, 144, 000 80, 000 Purchases of direct materials 68, 825 81, 525 Direct labor 30, 750 Manufacturing overhead 0 160, 000 92, 625 100, 125 343, 100 42, 000 45, 750 49, 500 168, 000 23, 640 26, 640 27, 640 28, 640 106, 560 Selling and administrative expenses 60, 000 60, 250 60, 500 60, 750 241, 500 Income taxes 17, 500 70, 000 (30, 000) Interest expense Total cash payments Ending cash balance before financing Minimum cash balance desired Projected cash excess (deficiency) 0 0 280, 715 (15, 715) (30, 000) (45, 715) © 2015 Pearson Education, Limited. 22 -68

2017 First Quarter Financing Ending cash balance + before financing Total effects of financing

2017 First Quarter Effects of Financing Ending cash balance + before financing $ (15, 715) + Total effects of financing $ 46, 000 © 2015 Pearson Education, Limited. = Ending cash balance = $ 30, 285 22 -70

Cash Budget—Second Quarter, Before Short-Term Financing Calculations Exhibit 22 -15 Cash Budget—Second Quarter, Before Short-Term Financing Calculations SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter $ 15, 000 Second Quarter $ 30, 285 Cash receipts 250, 000 268, 000 Cash available 265, 000 298, 285 80, 000 Purchases of direct materials 68, 825 81, 525 Direct labor 30, 750 Manufacturing overhead Beginning cash balance Cash payments: Capital expenditures Third Quarter Fourth Quarter 293, 000 318, 000 $ Total 15, 000 1, 129, 000 1, 144, 000 0 160, 000 92, 625 100, 125 343, 100 42, 000 45, 750 49, 500 168, 000 23, 640 26, 640 27, 640 28, 640 106, 560 Selling and administrative expenses 60, 000 60, 250 60, 500 60, 750 241, 500 Income taxes 17, 500 70, 000 (30, 000) Interest expense Total cash payments Ending cash balance before financing Minimum cash balance desired Projected cash excess (deficiency) 0 0 280, 715 (15, 715) (30, 000) (45, 715) © 2015 Pearson Education, Limited. 22 -71

2017 Second Quarter Interest Expense Principal × Rate × Time © 2015 Pearson Education,

2017 Second Quarter Interest Expense Principal × Rate × Time = Interest Expense $46,

Cash Budget—Third Quarter, Before Short-Term Financing Calculations Exhibit 22 -16 Cash Budget—Third Quarter, Before Short-Term Financing Calculations SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter $ 15, 000 Second Quarter $ 30, 285 Third Quarter $ 30, 990 Cash receipts 250, 000 268, 000 293, 000 Cash available 265, 000 298, 285 323, 990 80, 000 0 Purchases of direct materials 68, 825 81, 525 Direct labor 30, 750 Manufacturing overhead Beginning cash balance Cash payments: Capital expenditures Fourth Quarter 318, 000 $ Total 15, 000 1, 129, 000 1, 144, 000 0 160, 000 92, 625 100, 125 343, 100 42, 000 45, 750 49, 500 168, 000 23, 640 26, 640 27, 640 28, 640 106, 560 Selling and administrative expenses 60, 000 60, 250 60, 500 60, 750 241, 500 Income taxes 17, 500 70, 000 Interest expense Total cash payments Ending cash balance before financing Minimum cash balance desired 0 1, 380 280, 715 309, 295 (15, 715) (11, 010) (30, 000) © 2015 Pearson Education, Limited. 22 -74 (30, 000)

2017 Third Quarter Interest Expense Principal × Rate × Time = Interest Expense ©

2017 Third Quarter Interest Expense Principal × Rate × Time = Interest Expense ($46,

Completed Cash Budget Exhibit 22 -17 Completed Cash Budget SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter $ 15, 000 Second Quarter $ 30, 285 Third Quarter $ 30, 990 Fourth Quarter $ 30, 335 Cash receipts 250, 000 268, 000 293, 000 318, 000 1, 129, 000 Cash available 265, 000 298, 285 323, 990 348, 335 1, 144, 000 80, 000 0 0 160, 000 Purchases of direct materials 68, 825 81, 525 92, 625 100, 125 343, 100 Direct labor 30, 750 42, 000 45, 750 49, 500 168, 000 Manufacturing overhead 23, 640 26, 640 27, 640 28, 640 106, 560 Selling and administrative expenses 60, 000 60, 250 60, 500 60, 750 241, 500 Income taxes 17, 500 70, 000 1, 380 2, 640 1, 230 5, 250 280, 715 309, 295 246, 655 257, 745 1, 094, 410 (15, 715) (11, 010) 77, 335 90, 590 49, 590 (30, 000) (30, 000) Beginning cash balance Cash payments: Capital expenditures Interest expense Total cash payments Ending cash balance before financing Minimum cash balance desired 0 © 2015 Pearson Education, Limited. $ Total 15, 000 22 -77

2017 Fourth Quarter Interest Expense Principal × Rate × Time = Interest Expense ($46,

Completed Cash Budget Exhibit 22 -17 Completed Cash Budget SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter $ 15, 000 Second Quarter $ 30, 285 Third Quarter $ 30, 990 Fourth Quarter $ 30, 335 Cash receipts 250, 000 268, 000 293, 000 318, 000 1, 129, 000 Cash available 265, 000 298, 285 323, 990 348, 335 1, 144, 000 80, 000 0 0 160, 000 Purchases of direct materials 68, 825 81, 525 92, 625 100, 125 343, 100 Direct labor 30, 750 42, 000 45, 750 49, 500 168, 000 Manufacturing overhead 23, 640 26, 640 27, 640 28, 640 106, 560 Selling and administrative expenses 60, 000 60, 250 60, 500 60, 750 241, 500 Income taxes 17, 500 70, 000 1, 380 2, 640 1, 230 5, 250 280, 715 309, 295 246, 655 257, 745 1, 094, 410 (15, 715) (11, 010) 77, 335 90, 590 49, 590 (30, 000) (30, 000) Beginning cash balance Cash payments: Capital expenditures Interest expense Total cash payments Ending cash balance before financing Minimum cash balance desired 0 © 2015 Pearson Education, Limited. $ Total 15, 000 22 -79

Summary of Amounts Needed to Calculate 2017 Budgeted Net Income Account Budget Exhibit Sales Revenue Sales 22 -5 Cost of Goods Sold 22 -10 672, 400 S&A Expenses S&A Expense 22 -11 247, 50 Interest Expense Cash 22 -17 5, 250 Income Tax Expense Cash 22 -17 70, 000 © 2015 Pearson Education, Limited. Amount $ 1, 150, 000 22 -80

Budgeted Income Statement Exhibit 22 -18 Budgeted Income Statement SMART TOUCH LEARNING Budgeted Income Statement For the Year Ended December 31, 2017 Sales Revenue $ 1, 150, 000 Cost of Goods Sold 672, 400 Gross Profit 477, 600 Selling and Administrative Expenses 247, 500 Operating Income 230, 100 Interest Expense 5, 250 Income before Income Taxes 224, 850 Income Tax Expense Net Income 70, 000 $ © 2015 Pearson Education, Limited. 154, 850 22 -81

Summary of Amounts Needed to Calculate 2017 Budgeted Balance Sheet Account Source Exhibit Cash budget 22 -17 Accounts Receivable Cash receipts from customers 22 -12 91, 000 Raw Materials Inventory Direct materials budget 22 -7 42, 600 Finished Goods Inventory Production budget Cost of goods sold budget 22 -6 22 -10 Equipment 2016 balance sheet Capital expenditures budget 22 -4 210, 340 160, 000 Accumulated Depreciation 2016 balance sheet Manufacturing overhead budget S&A expense budget 22 -4 22 -9 22 -11 12, 000 48, 000 6, 000 Accounts Payable Cash payment 22 -13 25, 500 Common Stock 2016 balance sheet 22 -4 300, 000 Retained Earnings 2016 balance sheet Budgeted income statement 22 -4 22 -18 48, 340 154, 850 © 2015 Pearson Education, Limited. Amount $ $ 49, 590 140 units 294 per unit 22 -82

Budgeted Balance Sheet Exhibit 22 -19 Budgeted Balance Sheet SMART TOUCH LEARNING Balance Sheet December 31, 2017 Assets Current Assets: Cash $ Accounts Receivable Raw Materials Inventory Finished Goods Inventory Total Current Assets Property, Plant, and Equipment: Equipment ($210, 340 + $160, 000) Less: Accumulated Depreciation ($12, 000 + $48, 000 + $6, 000) Total Assets Liabilities Current Liabilities: Accounts Payable Stockholders' Equity Common Stock, no par $ Retained Earnings ($48, 340 + $154, 850) Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity © 2015 Pearson Education, Limited. 49, 590 91, 000 42, 600 41, 160 $ 224, 350 370, 340 (66, 000) $ 304, 340 528, 690 $ 25, 500 300, 000 203, 190 $ 503, 190 528, 690 22 -83

Budgeted Statement of Cash Flows Exhibit 22 -20 Budgeted Statement of Cash Flows SMART TOUCH LEARNING Budgeted Statement of Cash Flows For the Year Ended December 31, 2017 Operating Activities: Cash receipts from customers Cash payments for operating expenses* Cash payments for interest expense Cash payments for income taxes Net cash provided by operating activities Investing Activities: Cash payments for equipment purchases Net cash used for investing activities Financing Activities: Proceeds from issuance of notes payable Payment of notes payable Net cash provided by financing activities Net increase in cash Cash balance, January 1, 2017 Cash balance, December 31, 2017 $ 1, 129, 000 (859, 160) (5, 250) (70, 000) $ 194, 590 (160, 000) 88, 000 (88, 000) $ 0 34, 590 15, 000 49, 590 *Add payments for direct materials, direct labor, overhead, and S&A expenses ($343, 100 + $168, 000 + $106, 560 + $241, 500) © 2015 Pearson Education, Limited. 22 -84

>TRY IT! 13. Meeks Company has the following sales for the first quarter of

>TRY IT! 13. Receipts from cash sales January February $ $ Receipts from sales on account Total cash receipts from customers 5, 000 12, 500 $ 17, 500 © 2015 Pearson Education, Limited. 5, 500 March $ 15, 000 $ 20, 500 5, 250 14, 000 $ 19, 250 22 -86

Learning Objective 5 Describe how information technology can be used in the budgeting process

Technology makes it more cost effective for managers to • Conduct sensitivity analysis • Combine individual unit budgets to create the companywide master budget © 2015 Pearson Education, Limited. 22 -88

>TRY IT! 14. Crowley Company projects the following sales: January February March Cash sales $ 5, 000 $ Sales on account 15, 000 Total sales $ 20, 000 $ 5, 500 16, 500 22, 000 $ $ 6, 000 18, 000 24, 000 Crowley collects sales on account in the month after the sale. The Accounts Receivable balance on January 1 is $13, 500, which represents December’s sales on account. Crowley projects the following cash receipts from customers: January February March Cash receipts from cash sales $ 5, 000 $ 5, 500 $ 6, 000 © 2015 Pearson Education, Limited. 22 -89

>TRY IT! 14. Cash sales (20%) January February $ $ Sales on account (80%) 4, 000 16, 000 Total sales $ Receipts from cash sales $ 22, 000 February $ $ 4, 000 13, 500 $ 17, 500 © 2015 Pearson Education, Limited. $ 17, 600 January Receipts from sales on account Total cash receipts from customers 20, 000 4, 400 March 4, 400 19, 200 $ 20, 400 24, 000 March $ 16, 000 $ 4, 800 17, 600 $ 22, 400 22 -90

Learning Objective 6 Prepare an operating budget for a merchandising company (Appendix 22 A)

Master Budget Components— Merchandising Company Exhibit 22 A-1 Master Budget Components—Merchandising Company Sales Budget Inventory, Purchases, and Cost of Goods Sold Budget Operating Budget Selling and Administrative Expense Budget Capital Expenditures Budget Cash Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows Financial Budget © 2015 Pearson Education, Limited. 22 -92

Balance Sheet Exhibit 22 A-2 Balance Sheet GREG’S TUNES Budgeted Balance Sheet March 31, 2016 Assets Current Assets: Cash $ 16, 400 Accounts Receivable 16, 000 Merchandise Inventory 48, 000 Prepaid Insurance 1, 800 Total Current Assets $ Property, Plant, and Equipment: Equipment and Fixtures 32, 000 Less: Accumulated Depreciation (12, 800) Total Assets $ Liabilities Current Liabilities: Accounts Payable $ 16, 800 Salaries and Commissions Payable 4, 250 Total Liabilities $ Stockholders' Equity Common Stock, no par 20, 000 Retained Earnings 60, 350 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ © 2015 Pearson Education, Limited. 82, 200 19, 200 101, 400 21, 050 80, 350 101, 400 22 -93

Data for the Sales Budget Sales in March were $40, 000. The sales manager projects the following monthly sales: April $ 50, 000 May 80, 000 June 60, 000 July 50, 000 August 40, 000 Sales are 60% cash and 40% on account. Greg’s Tunes collects all credit sales the month after the sale. The $16, 000 balance in Accounts Receivable at March 31, 2016, is March’s sales on account (40% of $40, 000). There are no other Accounts Receivable. Uncollectible accounts are immaterial and thus aren’t included in the master budget. © 2015 Pearson Education, Limited. 22 -94

Sales Budget Exhibit 22 A-3 Sales Budget GREG’S TUNES Sales Budget Four Months Ended July 31, 2016 Cash sales (60%) Sales on account (40%) Total budgeted sales April May June July Total $ 30, 000 $ 48, 000 $ 36, 000 $ 30, 000 $ 144, 000 20, 000 32, 000 24, 000 20, 000 96, 000 $ 50, 000 $ 80, 000 $ 60, 000 $ 50, 000 $ 240, 000 © 2015 Pearson Education, Limited. 22 -95

Data for the Inventory, Purchases, and Cost of Goods Sold Budget • Beginning merchandise inventory is known from last month’s balance sheet • Budgeted cost of goods sold = 70% of sales • Ending merchandise inventory = $20, 000 + 80% of next month’s cost of goods sold © 2015 Pearson Education, Limited. 22 -96

Solving for the Budgeted Purchases Figure Beginning merchandise inventory Purchases + Purchases = Cost of goods sold − Ending merchandise inventory + Ending merchandise inventory © 2015 Pearson Education, Limited. = Cost of goods sold – Beginning merchandise inventory 22 -97

Inventory, Purchases, and Cost of Goods Sold Budget Exhibit 22 A-4 Inventory, Purchases, and Cost of Goods Sold Budget GREG’S TUNES Inventory, Purchases, and Cost of Goods Sold Budget Four Months Ended July 31, 2016 April May June July Total $ 35, 000 $ 56, 000 $ 42, 000 $ 35, 000 $ 168, 000 Cost of goods sold (70% × sales) Plus: Desired ending merchandise inventory [$20, 000 + (80% × COGS for next month)]* Total merchandise inventory required Less: Beginning merchandise inventory Budgeted Purchases 64, 800 53, 600 48, 000 42, 400 99, 800 109, 600 90, 000 77, 400 210, 400 (48, 000) (64, 800) (53, 600) (48, 000) $ 51, 800 $ 44, 800 $ 36, 400 $ 29, 400 $ 162, 400 *April: [$20, 000 + (80% × $56, 000)] = $64, 800 May: [$20, 000 + (80% × $42, 000)] = $53, 600 June: [$20, 000 + (80% × $35, 000)] = $48, 000 July: [$20, 000 + (80% × COGS for August)] = [$20, 000 + (80% × (70% × $40, 000))] = $42, 400 © 2015 Pearson Education, Limited. 22 -98

Data for the Selling and Administrative Expense Budget The monthly payroll for Greg’s Tunes is salaries of $2, 500 plus sales commissions equal to 15% of sales. This is a mixed cost, with both a fixed and a variable component. Other monthly expenses are as follows: Rent Expense $ 2, 000, paid as incurred Depreciation Expense $ 500 Insurance Expense $ 200 expiration of prepaid amount Miscellaneous Expense 5% of sales, paid as incurred © 2015 Pearson Education, Limited. 22 -99

Selling and Administrative Expense Budget Exhibit 22 A-5 Selling and Administrative Expense Budget GREG’S TUNES Selling and Administrative Expense Budget Four Months Ended July 31, 2016 April Variable expenses: Commissions Expense (15% of sales) Miscellaneous Expenses (5% of sales) Total variable expenses Fixed expenses: Salaries Expense Rent Expense Depreciation Expense Insurance Expense Total fixed expenses $ $ Total selling and administrative expenses May 7, 500 $ 2, 500 10, 000 2, 500 2, 000 500 200 5, 200 12, 000 $ 4, 000 16, 000 2, 500 2, 000 500 200 5, 200 $ 21, 200 $ © 2015 Pearson Education, Limited. June 9, 000 $ 3, 000 12, 000 2, 500 2, 000 500 200 5, 200 17, 200 $ July 7, 500 $ 2, 500 10, 000 2, 500 2, 000 500 200 5, 200 15, 200 $ Total 36, 000 12, 000 48, 000 10, 000 8, 000 2, 000 800 20, 800 68, 800 22 -100

>TRY IT! 15. Camp Company is a sporting goods store. The company sells a tent that sleeps six people. The store expects to sell 250 tents in 2014 and 280 tents in 2015. At the beginning of 2014, Camp Company has 25 tents in Merchandise Inventory and desires to have 5% of the next year’s sales available at the end of the year. How many tents will Camp Company need to purchase in 2014? © 2015 Pearson Education, Limited. 22 -101

>TRY IT! Budgeted tents to be sold Plus: Desired tents in ending inventory (280 tents × 5%) Total tents needed Less: Tents in beginning inventory Budgeted tents to be purchased © 2015 Pearson Education, Limited. 250 14 264 25 239 22 -102

Learning Objective 7 Prepare a financial budget for a merchandising company (Appendix 22 A)

Capital Expenditures Budget Greg’s Tunes plans to purchase a used delivery truck in April, paying $3, 000 at the time of the purchase. • No other capital expenditures • Cash payment will be shown on the cash budget © 2015 Pearson Education, Limited. 22 -104

Cash Receipts Exhibit 22 A-6 Cash Receipts from Customers GREG’S TUNES Budgeted Cash Receipts From Customers Four Months Ended July 31, 2016 April Cash sales (60%) $ Credit sales receipts, one month after sale (40%) Total budgeted sales 30, 000 $ 16, 000* $ 46, 000 $ May June July 48, 000 $ 36, 000 $ 30, 000 $ 20, 000 32, 000 24, 000 68, 000 $ 54, 000 $ Total 144, 000 92, 000 236, 000 * March 31 Accounts Receivable (Exhibit 22 A-2) Accounts Receivable balance, July 31: July sales on account to be collected in August, $20, 000 © 2015 Pearson Education, Limited. 22 -105

Cash Payments for Purchases Exhibit 22 A-7 Cash Payments for Purchases GREG’S TUNES Budgeted Cash Payments for Purchases Four Months Ended July 31, 2016 50% of last month’s purchases $ 50% of this month’s purchases Total cash payments for purchases $ April 16, 800* $ 25, 900 42, 700 $ May June 25, 900 $ 22, 400 18, 200 48, 300 $ 40, 600 $ July Total 18, 200 $ 83, 300 14, 700 81, 200 32, 900 $ 164, 500 * March 31 Accounts Payable (Exhibit 22 A-2) Accounts Payable balance, July 31: 50% of July purchases to be paid in August, $14, 700 © 2015 Pearson Education, Limited. 22 -106

April’s Cash Payments for Salaries and Commissions March payroll = Salaries + Sales commissions of 15% of sales = $2, 500 + (15% × $40, 000) = $2, 500 + $6, 000 = $8, 500 © 2015 Pearson Education, Limited. 22 -107

April’s Cash Payments for Selling and Administrative Expenses Payment of 50% of March’s salaries ($2, 500 × 50%) (from March 31 balance sheet, Exhibit 22 A-2) $ 1, 250 Payment of 50% of March’s commissions ($6, 000 × 50%) (from March 31 balance sheet, Exhibit 22 A-2) 3, 000 Payment of 50% of April’s salaries ($2, 500 × 50%) (Exhibit 22 A-5) 1, 250 Payment of 50% of April’s commissions ($7, 500 × 50%) (Exhibit 22 A-5) 3, 750 Payment of Rent Expense (Exhibit 22 A-5) 2, 000 Payment of Miscellaneous Expenses (Exhibit 22 A-5) 2, 500 Total April cash payments for S&A Expenses © 2015 Pearson Education, Limited. $ 13, 750 22 -108

Cash Payments for Selling and Administrative Expenses Exhibit 22 A-8 Cash Payments for Selling and Administrative Expenses GREG’S TUNES Budgeted Cash Payments for Selling and Administrative Expenses Four Months Ended July 31, 2016 April Variable expenses: 50% of last month’s Commissions Expense $ 50% of this month’s Commissions Expense Miscellaneous Expenses Total payments for variable expenses Fixed expenses: 50% of last month’s Salaries Expense 50% of this month’s Salaries Expense Rent Expense Total payments for fixed expenses $ Total payments for S&A expenses May 3, 000 $ 3, 750 2, 500 9, 250 1, 250 2, 000 4, 500 13, 750 $ 6, 000 4, 000 13, 750 1, 250 2, 000 4, 500 $ 18, 250 $ June 6, 000 $ 4, 500 3, 000 13, 500 1, 250 2, 000 4, 500 18, 000 $ July 4, 500 $ 3, 750 2, 500 10, 750 1, 250 2, 000 4, 500 15, 250 $ Total 17, 250 18, 000 12, 000 47, 250 5, 000 8, 000 18, 000 65, 250 Salaries and Commissions Payable balance, July 31: 50% of July salaries and commissions to be paid in August, $5, 000 © 2015 Pearson Education, Limited. 22 -109

Data for Short-Term Financing • • $10, 000 minimum cash balance Borrow in $1, 000 increments 12% annual interest rate Borrow no more than needed to maintain the $10, 000 minimum ending cash balance • Notes payable is an installment loan which requires $1, 000 payments of principal and monthly interest even if there is excess cash on hand • Borrowing and all principal and interest payments occur at the end of the month © 2015 Pearson Education, Limited. 22 -110

Cash Budget Exhibit 22 A-9 Cash Budget GREG’S TUNES Cash Budget Four Months Ended July 31, 2016 Beginning cash balance $ April 16, 400 $ May 10, 950 $ June 11, 320 $ July 19, 650 $ Total 16, 400 Cash receipts 46, 000 68, 000 54, 000 236, 000 Cash available 62, 400 78, 950 79, 320 73, 650 252, 400 Cash payments: Capital expenditures 3, 000 0 3, 000 Purchases of merchandise inventory 42, 700 48, 300 40, 600 32, 900 164, 500 Selling and administrative expenses 13, 750 18, 250 18, 000 15, 250 65, 250 0 59, 450 80 66, 630 70 58, 670 60 48, 210 232, 960 2, 950 12, 320 20, 650 25, 440 19, 440 (10, 000) (7, 050) (10, 000) 2, 320 (10, 000) 10, 650 (10, 000) 15, 440 (10, 000) 9, 440 Interest Expense Total cash payments Ending cash balance before financing Minimum cash balance desired Projected cash excess (deficiency) Financing: Borrowing 8, 000 © 2015 Pearson Education, Limited. Principal repayments (1, 000) 22 -111 (1, 000) (3, 000)

Budgeted Income Statement Exhibit 22 A-10 Budgeted Income Statement GREG’S TUNES Budgeted Income Statement Four Months Ended July 31, 2016 Sales Revenue Cost of Goods Sold Gross Profit Selling and Administrative Expenses Commissions Expense $ Miscellaneous Expense Salaries Expense Rent Expense Depreciation Expense Insurance Expense Total Selling and Administrative Expenses Operating Income Interest Expense Net Income $ 240, 000 168, 000 72, 000 36, 000 12, 000 10, 000 8, 000 2, 000 800 © 2015 Pearson Education, Limited. $ 68, 800 3, 200 210 2, 990 22 -112

Summary of the Sources for the Balance Sheet Figures Account Source Exhibit Cash budget 22 A-9 Accounts Receivable Cash receipts from customers 22 A-6 20, 000 Merchandise Inventory, purchases, and COGS budget 22 A-4 42, 400 Prepaid Insurance March 31 balance sheet S&A expense budget 22 A-2 22 A-5 1, 800 Equipment March 31 balance sheet Capital expenditures budget 22 A-2 32, 000 3, 000 Accumulated Depreciation March 31 balance sheet S&A expense budget 22 A-2 22 A-5 12, 800 2, 000 Accounts Payable Cash payments for purchases 22 A-7 14, 700 Salaries and Commissions Payable Cash payments for S&A expenses 22 A-8 5, 000 Notes Payable Cash budget 22 A-9 5, 000 Common Stock March 31 balance sheet 22 A-2 20, 000 Retained Earnings March 31 balance sheet Budgeted income statement 22 A-2 22 A-10 60, 350 2, 990 © 2015 Pearson Education, Limited. Amount $ 24, 440 22 -113

Budgeted Balance Sheet Exhibit 22 A-11 Budgeted Balance Sheet GREG’S TUNES Budgeted Balance Sheet July 31, 2016 Assets Current Assets: Cash $ Accounts Receivable Merchandise Inventory Prepaid Insurance ($1, 800 − $800) Total Current Assets Property, Plant, and Equipment: Equipment and Fixtures ($32, 000 + $3, 000) Less: Accumulated Depreciation ($12, 800 + $2, 000) Total Assets Liabilities Current Liabilities: Accounts Payable $ Salaries and Commissions Payable Notes Payable – Short-Term Total Liabilities Stockholders' Equity Common Stock, no par Retained Earnings ($60, 350 + $2, 990) Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity © 2015 Pearson Education, Limited. 24, 440 20, 000 42, 400 1, 000 $ 87, 840 35, 000 (14, 800) $ 20, 200 108, 040 14, 700 5, 000 $ 24, 700 20, 000 63, 340 $ 83, 340 108, 040 22 -114

Budgeted Statement of Cash Flows Exhibit 22 A-12 Budgeted Statement of Cash Flows GREG’S TUNES Budgeted Statement of Cash Flows Four Months Ended July 31, 2016 Operating Activities: Cash receipts from customers Cash payments for purchases Cash payments for S&A expenses Cash payments for interest expense Net cash provided by operating activities Investing Activities: Cash payments for equipment purchases Net cash used for investing activities Financing Activities: Proceeds from issuance of notes payable Payment of notes payable Net cash provided by financing activities Net increase in cash Cash balance, April 1, 2016 Cash balance, July 31, 2016 $ 236, 000 (164, 500) (65, 250) (210) $ 6, 040 (3, 000) 8, 000 (3, 000) © 2015 Pearson Education, Limited. $ 5, 000 8, 040 16, 400 24, 440 22 -115

>TRY IT! 16. Connor Company began operations on January 1 and has projected the following selling and administrative expenses: Rent Expense $1, 000 per month, paid as incurred Utilities Expense $500 per month, paid in month after incurred Depreciation Expense $300 per month per Insurance Expense $100 January 1 Determine the cash payments for selling and administrative expenses for the first three months of operations. © 2015 Pearson Education, Limited. 22 -116