Paper For Above instruction
The primary objective of this assignment is to develop an integrated budgeting plan for Earrings Unlimited, emphasizing the importance of effective financial planning in maintaining liquidity and supporting operational activities. The assignment requires methodical preparation of various detailed budgets based on provided data about sales, costs, payment terms, and operating expenses, culminating in a projected income statement and balance sheet as of June 30.
Sales Budget
Begin by estimating the sales volume for April, May, and June, based on historical actuals and future forecasts, considering seasonal factors like Mother's Day which influences May sales. All earrings are sold at a selling price of $10 per pair. Calculate the total sales revenue for each month and the quarter, consolidating these figures for overall analysis. Accurate sales budgeting is essential as it influences subsequent cash collections and inventory planning.
Schedule of Expected Cash Collections
Construct a detailed schedule of cash inflows from collections of sales on credit. Recognize that only 20% of sales are collected in the month of sale, with an additional 70% collected in the following month, and the remaining 10% in the second month after the sale. This schedule provides insight into cash flow timing and helps in planning liquidity needs. Summing these collections monthly and for the quarter allows for accurate forecasted cash receipts.
Merchandise Purchases Budget
Develop the purchases budget by calculating the number of earrings to be purchased each month, factoring in the desired ending inventory levels (40% of the next month’s sales). Take into account beginning
inventory levels, costs per unit ($4), and compute the total dollar amount needed for purchases each month and for the quarter. Ensuring sufficient inventory while avoiding overstocking aligns with cost control and operational efficiency.
Schedule of Expected Cash Disbursements for Purchases
Outline cash payments for merchandise purchases, considering that half of each month’s purchases are paid in the same month, and the remaining half is paid in the following month. This schedule aids in cash flow management, helping to identify potential periods of cash shortages or surpluses.
Cash Budget
Prepare a detailed cash budget for April, May, and June, starting with the opening cash balance, adding collections from customers, and deducting disbursements for merchandise, operating expenses, and planned equipment purchases. Incorporate minimum cash balance requirements ($50,000), and determine necessary borrowings or repayments, including the calculation of interest at a monthly rate of 1%. This component is vital for ensuring liquidity and managing debt efficiently, especially considering planned capital expenditures and dividends.
Budgeted Income Statement
Construct a contribution approach income statement for the quarter, projecting sales revenue, variable expenses (cost of goods sold and commissions), and fixed expenses (insurance, advertising, rent, salaries, utilities, insurance, depreciation). Calculate net operating income, including interest expense, to determine net income. This financial snapshot provides insights into profit margins and operational efficiency.
Budgeted Balance Sheet
Forecast the assets, liabilities, and equity as of June 30, incorporating projected cash balances, accounts receivable (based on sales collection percentages), inventory levels, prepaid expenses, and property and equipment additions. Ensure the balance sheet aligns with the income statement results and cash flow forecasts, maintaining the accounting equation’s balance.
Conclusion
Executing this comprehensive budgeting process enables Earrings Unlimited to foresee financial needs, optimize cash flows, and strategically plan for growth and stability. The integration of detailed budgets
supports management decision-making, helps prevent cash shortages, and facilitates better control over company resources.
References
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