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Chapter 22: 19RQ (page 1228)
What budgets are included in the financial budget for a merchandising company?
The financial budget for a merchandising company includes a capital expenditure budget and a cash budget.
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Using sensitivity analysis Holly Company prepared the following budgeted income statement for the first quarter of 2018:
Holly Company is considering two options. Option 1 is to increase advertising by \(700 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 45% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 30% per month rather than 20%.
Requirements
1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain \)8,000. Round all calculations to the nearest dollar.
2. Which option should Holly choose? Explain your reasoning.
Question: Preparing a financial budget鈥攕chedule of cash receipts, schedule cash payments, cash budget
Baxter Company鈥檚 budget committee provides the following information: December 31, 2017, account balances:
1. Prepare the schedule of cash receipts from customers for January and February 2018. Assume cash receipts are 80% in the month of the sale and 20% in the month following the sale.
2. Prepare the schedule of cash payments for purchases for January and February 2018. Assume purchases are paid 60% in the month of purchase and 40% in the month following the purchase.
3. Prepare the schedule of cash payments for selling and administrative expenses for January and February 2018. Assume 40% of the accrual for Salaries and Commissions Payable is for commissions and 60% is for salaries. The December 31 balance will be paid in January. Salaries and commissions are paid 30% in the month incurred and 70% in the following month. Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.
4. Prepare the cash budget for January and February 2018. Assume no financing took place.
What is sensitivity analysis? Why is it important for managers?
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鈥檚 bank requires a \(26,000 minimum balance in the firm鈥檚 checking account. At the end of any month when the account balance falls below \)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鈥檚 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?
Preparing an operating budget鈥攕elling and administrative expense budget
Consider the sales budget presented in Exercise E22-31. Slate鈥檚 selling and administrative expenses include the following:
Rent, \(2,000 per month
Salaries, \)4,000 per month
Commissions, 5% of sales
Depreciation, $1,000 per month
Miscellaneous expenses, 2% of sales
Prepare a selling and administrative expense budget for each of the three quarters of 2018 and totals for the nine-month period.
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