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You have just been hired as a management trainee by Cravat Sales Company, a nationwide distributor of a designer's silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression on the president and have assembled the information below. The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows: The large buildup in sales before and during June is due to Father's Day. Ending inventories are supposed to equal 90% of the next month's sales in units. The ties cost the company $5 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 25% of a month's sales are collected by month end. An additional 50% are collected in the following month, and the remaining 25% are collected in the second month following sale. Bad debts have been negligible. The company's monthly selling and administrative expenses are given below: All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for $25,000cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 included in Exhibit 1. The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $140,000. 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 ), whillestill retaining at least $10,000 in cash. Exhibit I Assets Cash $14,000 Accounts receivable ( $48,000 February sales; $168,000 March sales) 216,000 Inventory (31,500 units) 157,500 Prepaid insurance 14,400 Fixed assets, net of depreciation 172700 Total assets $574.600 Llabilities and Shareholders' Equity Accounts payable Dividends payable Common shares Retained earnings Total liabilities and shareholders' equity $85.750 12.000 300,000 176,850 $574,600 Prepare a master budget for the three-month period ending June 30 . Include the following detailed budgets: 1. A schedule of expected cash collections. 2. A schedule of inventory purchases. 3. A schedule of expected cash disbursements for purchases. 4. A schedule of expected cash disbursements for operating expenses. 5. A cash budget. 6. A budgeted income statement for the three-month period ending June 30 . 7. A budgeted balance sheet as of June 30 . CRAVET SALES COMPANY CRAVET SALES COMPANY Schedule of Expected Cash Disbursements for Operating Expenses CRAVET SALES COMPANY Cash Budget June 30 Cash balance, beginning Add: Collections from sales Total cash available Deduct: Disbursements: Purchase of inventory Operating expenses Dividends Purchase of Land Total disbursements Excess (deficiency) of cash LEFTOVER CASH Borrowings Repayments Interest Total financing Cash balance, ending - has to be $10,000 \begin{tabular}{llll} & (3,020) & (3,020) \\ \hline 10,250 & 10,000 & 10,730 & 10,730 \\ \hline \end{tabular} CRAVET SALES COMPANY Income Statement For the Quarter ended June 30 Sales Cost of goods sold Gross profit or margin Operating expenses Earings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Income tax expense Earnings after tax (EAT) or net income CRAVET SALES COMPANY Balance Sheet As at June 30 Assets: Mar. 31 Jun. 30 Current assets Cash Accounts receviable Prepaid insurance Inventory Total current assets Plant and equipment, net Total assets Liabilities and Shareholders' Equity Current liabilities: Accounts payable Dividends payable Bank ioan Total liabilities Shateholders Equity: Common shares Retained earning: Total shareholders equity Total liabilities and shareholders equity \begin{tabular}{rr|r} 85,750 & 105,000 \\ 12,000 & 12,000 \end{tabular} Purchase budget \begin{tabular}{|l|l} 300,000 & 300,000 \\ 176,850 & 316,730 \\ \hline 476,850 & 616,730 \\ \hline \end{tabular} Beginning R/E + Net income - Dividends = Ending R/E 5574,6005844,730

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