End of Chapter “A” Ch.

7: Budgeting Problems (Long questions)

Problem 1A

Retro Rocket Sales (RRS) is a merchandiser that sells model rockets designed to resemble the Saturn V
rocket, used in NASA’s Apollo space program. The rockets are purchased from an overseas
manufacturer and sold directly to customers over the internet and through a network of retail outlets.
Currently the selling price is $1,500 per rocket; the price will increase to $1,620 on March 1 to cover an
anticipated increase in costs. Planned sales for the first four months of 20X1 are indicated below.

Period January February March April

Targeted Sales (in units) 500 530 620 700

Prepare a Sales Budget for the first quarter of 20X1.

Retro Rocket Sales

Sales Budget
For quarter ended March 31, 20X1
January February March Total

Total sales in dollars

Cash Collections: The majority of sales—80%--are through retail outlets which purchase on credit. As a
rule, 30% of credit sales are collected in the month of sale, 68% are collected the month following the
sale, and 2% are never collected. The remaining 20% of sales are to individual purchases over the
internet, who purchase using a credit card. As these funds are received into the company’s bank
account overnight, they are counted as cash sales.

Prepare a Cash Collections Budget for the first quarter of 20X1. Assume that the Accounts Receivable
balance at January 1 will be $218,400 (noting that $6,240 of this (2/70) is not expected to be collected).

Retro Rocket Sales

Cash Collections Budget
For quarter ended March 31, 20X1
January February March Total

Total cash collections

End of Chapter “A” Ch. 7: Budgeting Problems (Long questions)

Purchases: In an effort to ensure it never loses a sale due to product shortages, RSS requires a month-
end inventory equal to 40% of the following month’s expected sales. The current purchase cost of
rockets is $600 each. This is expected to rise to $650 effective March 1. Based on its inventory policy,
RRS expects to have 200 rockets in inventory as of January 1, 20X1, valued at $600 each.

Prepare a Purchase Budget for the first quarter of 20X1.

Retro Rocket Sales

Purchase Budget
For quarter ended March 31, 20X1
January February March Total

Total purchase budget in dollars

Payments for Merchandise: The timing of the purchase within the month will impact when payment is
made. As a rule, 25% of inventory purchases are paid for in the month of purchase, with the remaining
75% being paid for in the following month. The balance in Accounts Payable at January 1 is expected to
be $270,000, reflecting that owed for unpaid purchases in the previous month.

Prepare a Cash Payment Budget for Inventory for the first quarter of 20X1.

Retro Rocket Sales

Cash Payment Budget for Inventory
For quarter ended March 31, 20X1
January February March Total

Total cash disbursements for inventory

purchases

(LO 7.4)
End of Chapter “A” Ch. 7: Budgeting Problems (Long questions)

Problem 2A

Able Appliance Sales would like your help preparing its selling and administrative budget as well as the
related cash disbursement budget for the first quarter of 20X1. All of the necessary information is
provided below:

Sales salaries/month $15,000 Admin salaries/month $20,000

Commissions % sales 5% Office supplies: January $100, February $75
Sales supplies % sales 1% March $125
Delivery costs % sales 8% Insurance expense/month $1,500
Office equipment
Advertising/month $7,000 depreciation/year $8,400
Fixtures depreciation/year $9,000 Other admin. expenses/month $300
Other selling costs % sales 1%
Period January February March Total
Budgeted Sales $650,000 $675,000 $700,000 $2,025,000

Able Appliance Sales

Selling and Administrative Budget
For the quarter ended March 31, 20X1
January February March Total
Selling Budget:

Total selling costs

Administrative Budget

Total Administrative costs

Total Selling & Administrative Costs

End of Chapter “A” Ch. 7: Budgeting Problems (Long questions)

Able Appliance Sales

Cash Payment Budget for Selling and Administrative Expenses
For the quarter ended March 31, 20X1
January February March Total
Selling Budget:

Cash disbursements for selling costs

Administrative Budget

Cash disbursement for admin costs

Cash disbursements for selling and

administration costs

(LO 4)
End of Chapter “A” Ch. 7: Budgeting Problems (Long questions)

Problem 3A
Corner Store Company is a small retail outlet in a rural part of the province. Upon completing its Sales
Budget, Purchase Budget and related Cash Collections and Disbursements Budgets for the year ended
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Total cash collections from sales $128,000 $133,000 $140,000 $160,000
Cash payments for inventory $65,000 $75,000 $77,000 $82,000
Cash payments for selling & admin
costs $40,000 $43,000 $44,000 $50,000
December 31, 20X1, the following summary is available:

In addition to cash collections from sales, Corner Store expects to collect $20,000 on a note receivable in
the third quarter. Additional cash disbursements include
● $10,000 dividend paid to the owner in quarters 2 and 4

● $43,000 for purchase of equipment in quarter 1

● $50,000 for deposit on future land purchase in quarter 4.

Corner Store has a policy of requiring a minimum cash on hand for budget purposes of $10,000. If
financing is required, it has a line of credit with its bank for $30,000 which charges interest at 10% per
year. The beginning cash balance is expected to be $11,500.

Prepare a Cash Budget for Corner Store Company for the year ended December 31, 20X1 in good
format.
Corner Store Company
Cash Budget
For year ended December 31, 20X1
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Beginning cash balance

= Cash available

Total cash payments

Total financing
End of Chapter “A” Ch. 7: Budgeting Problems (Long questions)

Ending cash balance

(LO 7.4)
Problem 4A

Able Awnings sells awnings for a wide variety of recreation vehicles. A basic form of the company’s
Balance Sheet at the beginning of the year is presented below:

Able Awnings
Balance Sheet
January 1, 20X1
Assets Liabilities
Cash $14,000 Accounts Payable $45,000
Accounts Receivable 75,000 Bank Loan Payable 0
Note Receivable 15,000 Interest Payable 0
Inventory 80,000 Total Liabilities 45,000
Store Equipment 40,000 Shareholders' Equity
Accumulated
Depreciation - Store
Equipment (20,000) Share Capital 100,000
Office Equipment 9,000 Retained Earnings 65,500
Accumulated
Depreciation - Office
Equipment (2,500) Total Shareholders' Equity 165,500
$210,50 Total Liabilities &
Total Assets 0 Shareholders' Equity $210,500

Able Awnings has been developing its budgets for 20X1, and provides the following selected information
from the “Total” columns of its budgets:

From Sales Budget: From Cash Budget:

Sales (in dollars) $400,000 Cash collected from sales $408,000
From Purchase Budget: Cash collected on note 15,000
Ending inventory $90,000 Cash payments for inventory (255,000)
Total purchase budget $245,000 Cash payments for selling and (112,000)
admin costs
From Selling and Administrative Budget:
Total selling costs $75,000 Other cash payments (store (60,000)
equipment)
includes depreciation store equipment 2,000
Total administration costs $40,000 Borrowing 8,000
includes depreciation office equipment 1,000 Repayment of amount borrowed (5,700)
Interest paid on borrowing (300)
Note: Interest owed on unrepaid 75
borrowing

Based on the information provided in the opening Balance Sheet and the various budgets, prepare a
proforma Income Statement for the year ended December 31, 20X1, and a proforma Balance Sheet for
End of Chapter “A” Ch. 7: Budgeting Problems (Long questions)

December 31, 20X1. (Note – assume all selling and administrative cash costs were paid for in the period
incurred.)

Able Awnings
Budgeted Income Statement
For the year ended December 31, 20X1
Sales

= Net income

Able Awnings
Budgeted Balance Sheet
December 31, 20X1
Assets Liabilities

Total Liabilities & Shareholders'

Total Assets Equity
End of Chapter “A” Ch. 7: Budgeting Problems (Long questions)

(LO 7.4)