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Chapter 22: Q57CP (page 1261)

Preparing a financial budget

This problem continues the Piedmont Computer Company situation from Chapter 21. Assume Piedmont Computer began January with \(15,000 cash. Management forecasts that cash receipts from credit customers will be \)48,000 in January and \(51,000 in February. Projected cash payments include equipment purchases (\)20,000 in January and \(41,000 in February) and selling and administrative expenses (\)2,000 each month).

Piedmont Computer Company’s bank requires a \(26,000 minimum balance in the firm’s checking account. At the end of any month when the account balance falls below \)26,000, the bank automatically extends credit to the firm in multiples of \(5,000. Piedmont Computer Company borrows as little as possible and pays back loans each month in \)1,000 increments, plus 12% interest on the entire unpaid principal. The first payment occurs one month after the loan.

Requirements

1. Prepare Piedmont Computer Company’s cash budget for January and February 2020.

2. How much cash will Piedmont Computer Company borrow in February if cash receipts from customers that month total \(41,000 instead of \)51,000?

Short Answer

Expert verified

Leichter Auto Parts will not borrow any amount in February if collections from customers that month total $41,000 instead of $51,000.

Step by step solution

01

Preparation of schedule of cash payments 

January

February

Beginning cash balance

$15,000

$41,000

ADD: Cash received from customers

$48,000

$51,000

Cash available

$63,000

$92,000

LESS: Payments:

Inventory purchase

$20,000

$41,000

Selling and administrative expenses

$2,000

$2,000

Total cash payments

$22,000

$43,000

Ending cash balance before financing

$41,000

$49,000

Financing:

Borrowing

$0

$0

Ending cash balance financing

$41,000

$43,000

02

Sensitivity analysis

February

Beginning cash balance

$41,000

ADD: Cash received from customers

$41,000

Cash available

$82,000

LESS: Payments:

Inventory purchase

$41,000

Selling and administrative expenses

$2,000

Total cash payments

$43,000

Ending cash balance before financing

$39,000

Financing:

Borrowing

$0

Ending cash balance financing

$39,000

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Most popular questions from this chapter

What is the formula used to determine the amount of direct materials to be purchased?

Question: Completing a comprehensive budgeting problem—manufacturing company

The Gerard Tire Company manufactures racing tires for bicycles. Gerard sells tires for \(90 each. Gerard is planning for the next year by developing a master budget by quarters. Gerard’s balance sheet for December 31, 2018, follows:

Other data for Gerard Tire Company:

a. Budgeted sales are 1,500 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account.

b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)33 each.

c. Desired ending Finished Goods Inventory is 30% of the next quarter’s sales; first quarter sales for 2020 are expected to be 2,300 tires. FIFO inventory costing method is used.

d. Raw Materials Inventory on December 31, 2018, consists of 600 pounds of rubber compound used to manufature the tires.

e. Direct materials requirements are 2 pounds of a rubber compound per tire. The cost of the compound is \(8.50 per pound.

f. Desired ending Raw Materials Inventory is 40% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019 is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes.

g. Each tire requires 0.4 hours of direct labor; direct labor costs average \)12 per hour.

h. Variable manufacturing overhead is \(4 per tire.

i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(16,770 per quarter for other costs, such as utilities, insurance, and property taxes.

j. Fixed selling and administrative expenses include \)12,500 per quarter for salaries; \(3,000 per quarter for rent; \)450 per quarter for insurance; and \(2,000 per quarter for depreciation.

k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)15,000 for new manufacturing equipment, to be purchased and paid in the first quarter.

m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes.

n. Direct materials purchases are paid 60% in the quarter purchased and 40% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

p. Income tax expense is projected at \(1,500 per quarter and is paid in the quarter incurred.

q. Gerard desires to maintain a minimum cash balance of \)55,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirements

1. Prepare Gerard’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.

2. Prepare Gerard’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.

How is the predetermined overhead allocation rate determined?

Preparing an operating budget—direct materials budget

Bell expects to produce 1,800 units in January and 2,155 units in February. The company budgets 3 pounds per unit of direct materials at a cost of $10 per pound. Indirect materials are insignificant and not considered for budgeting purposes. The balance in the Raw Materials Inventory account (all direct materials) on January 1 is 4,950 pounds. Bell desires the ending balance in Raw Materials Inventory to be 20% of the next month’s direct materials needed for production. Desired ending balance for February is 4,860 pounds. Prepare Bell’s direct materials budget for January and February.

Patrick works for McGill’s Computer Repair, owned and operated by Frank McGill. As a computer technician, Patrick has grown accustomed to friends and family members asking for assistance with their personal computers. In an effort to increase his income, Patrick started a personal computer repair business that he operates out of his home on a part-time basis, working evenings and weekends. Because Patrick is doing this “on the side” for friends and family, he does not want to charge as much as McGill’s charges its customers. When Frank McGill assigned Patrick the task of developing the budget for his department, Patrick increased the amount budgeted for computer parts. When the budget was approved, Patrick purchased as many parts as the budget allowed, even when they were not needed. He then took the extra parts home to use in his personal business in an effort to keep his costs down and profits up. So far, no one at McGill’s has asked about the parts expense because Patrick has not allowed the actual amount spent to exceed the budgeted amount.

Requirements

1. Why would Patrick’s actions be considered fraudulent?

2. What can a company do to protect against this kind of business risk?
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