As True Printing’s controller, you have assembled the following additional information:
a. April dividends of $3,500 were declared and paid.
b. April capital expenditures of $16,900 budgeted for cash purchase of equipment.
c. April depreciation expense, $200.
Requirements
1. Prepare the sales budget for April.
2. Prepare the inventory, purchases, and cost of goods sold budget for April.
3. Prepare the selling and administrative expense budget for April.
4. Prepare the schedule of cash receipts from customers for April.
5. Prepare the schedule of cash payments for selling and administrative expenses for April.
6. Prepare the cash budget for April. Assume the company does not use short-term financing to
maintain a minimum cash balance.
7. Prepare the budgeted income statement for April.
8. Prepare the budgeted balance sheet at April 30, 2016.
9. Prepare the budgeted statement of cash flows for April.
SOLUTION
Requirement 1
TRUE PRINTING COMPANY
Sales Budget
For the Month Ended April 30, 2016
Total budgeted sales
Requirement 2
TRUE PRINTING COMPANY
Inventory, Purchases, and Cost of Goods Sold Budget
For the Month Ended April 30, 2016
Cost of goods sold (40% of sales)
$ 34,800
Desired ending merchandise inventory
Total merchandise inventory required
Less: Beginning merchandise inventory
Budgeted purchases
$ 47,500
Requirement 3
TRUE PRINTING COMPANY
Selling and Administrative Expense Budget
For the Month Ended April 30, 2016
Variable expenses:
Miscellaneous Expenses (10% of sales)
Fixed expenses:
Depreciation Expense
Total fixed expenses
Total selling and administrative expenses
P22A-56B, cont.
Requirement 4
TRUE PRINTING COMPANY
Budgeted Cash Receipts from Customers
For the Month Ended April 30, 2016
Current month sales, 60%
$ 52,200
Prior month sales, 40%
Total cash receipts
$ 69,300
Accounts Receivable balance, April 30, 2016:
April sales, 40% collected in May 2016
$ 34,800
Requirement 5
TRUE PRINTING COMPANY
Budgeted Cash Payments for Selling and Administrative Expenses
For the Month Ended April 30, 2016
Variable expenses:
Miscellaneous Expenses
Fixed expenses:
40% of current month’s salaries expense
Total payments for selling and administrative expenses
Salaries Payable balance, April 30, 2016:
April Salaries Expense, 60% paid in May 2016
$23,400
P22A-56B, cont.
Requirement 6
TRUE PRINTING COMPANY
Cash Budget
For the Month Ended April 30, 2016
Beginning cash balance
Cash receipts
Cash available
Cash payments:
Purchases of merchandise inventory*
Selling and administrative expenses
Dividends
Capital expenditures
Total cash payments
Ending cash balance
*Accounts Payable balance, March 31, 2016
$ 8,300
April cash purchases
9,900
April credit purchases—50% paid in April
Total cash payments for purchases
Requirement 7
TRUE PRINTING COMPANY
Budgeted Income Statement
For the Month Ended April 30, 2016
Sales Revenue
Cost of Goods Sold
Gross Profit
Selling and Administrative Expenses
Depreciation Expense
Salaries Expense
39,000
Total Selling and Administrative Expenses
Net Income
P22A-56B, cont.
Requirement 8
TRUE PRINTING COMPANY
Budgeted Balance Sheet
April 30, 2016
Assets
Current Assets:
Cash (from Req. 6)
$ 37,900
Accounts Receivable (from Req. 4)
34,800
Merchandise Inventory
24,800
Total Current Assets
Property, Plant, and Equipment:
Equipment and Fixtures ($81,200 + $16,900)
98,100
Less: Accumulated Depreciation ($12,200 + $200)
Total Assets
$ 183,200
Liabilities
Current Liabilities:
Accounts Payable (50% of April purchases)
$ 18,800
Salaries Payable (from Req. 5)
23,400
Total Liabilities
Common Stock
$ 20,000
Retained Earnings ($120,200 + $4,300 – $3,500)
121,000
Total Stockholders’ Equity
$ 183,200
P22A-56B, cont.
Requirement 9
TRUE PRINTING COMPANY
Budgeted Statement of Cash Flows
For the Month Ended April 30, 2016
Operating Activities (from Req. 6):
Cash receipts from customers
$ 69,300
Cash payments for purchases
(37,000)
Cash payments for selling and administrative expenses
(24,300)
Net cash provided by operating activities
$ 8,000
Investing Activities:
Cash payments for equipment purchases
(16,900)
Net cash used for investing activities
(16,900)
Financing Activities:
Cash payment of dividends
Net cash used for financing activities
Net decrease in cash
(12,400)
Cash balance, April 1, 2016
50,300
Cash balance, April 30, 2016
$ 37,900
Continuing Problem
P22-57 Preparing a financial budget
This problem continues the Daniels Consulting situation from Problem P20-43 of Chapter 20. Assume
Daniels Consulting began January with $12,000 cash. Management forecasts that cash receipts from
credit customers will be $52,000 in January and $55,000 in February. Projected cash payments include
equipment purchases ($16,000 in January and $40,400 in February) and selling and administrative
expenses ($6,000 each month).
Daniels’s bank requires a $23,000 minimum balance in the firm’s checking account.
At the end of any month when the account balance falls below $23,000, the bank automatically extends
credit to the firm in multiples of $5,000. Daniels 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 Daniels Consulting’s cash budget for January and February 2018.
2. How much cash will Daniels borrow in February if cash receipts from customers that month total
$30,000 instead of $55,000?
SOLUTION
Requirement 1
DANIELS CONSULTING, INC.
Cash Budget
For the Two Months Ended February 28, 2018
January
February
Total
Beginning cash balance
$ 12,000
$ 42,000
$ 12,000
Cash receipts from customers
52,000
55,000
107,000
Cash available
64,000
97,000
119,000
Cash payments:
Equipment purchases
16,000
40,400
56,400
Selling and administrative expenses
Total cash payments
22,000
46,400
68,400
Ending cash balance before financing
42,000
50,600
50,600
Minimum cash balance desired
Projected cash excess (deficiency)
19,000
27,600
27,600
Financing:
Borrowing
Principal repayments
Total effects of financing
Ending cash balance
$ 42,000
$ 50,600
$ 50,600
P22-57, cont.
Requirement 2
February
Revised
Beginning cash balance
$ 42,000
Cash receipts from customers
30,000
Cash available
72,000
Cash payments:
Equipment purchases
40,400
Selling and administrative expenses
Total cash payments
46,400
Ending cash balance before financing
25,600
Minimum cash balance desired
Projected cash excess (deficiency)
2,600
Financing:
Borrowing
Principal repayments
Total effects of financing
Ending cash balance
$ 25,600
Daniels will still not need to borrow in February even if cash receipts from customers total $30,000
instead of $55,000 because the ending cash balance before financing is $2,600 greater than the $23,000
minimum required.
Critical Thinking
Decision Case 22-1
Each autumn, as a hobby, Anne Magnuson weaves cotton place mats to sell through a local craft shop.
The mats sell for $20 per set of four. The shop charges a 10% commission and remits the net proceeds to
Magnuson at the end of December. Magnuson has woven and sold 25 sets each year for the past two
Requirements
1. Prepare a cash budget for the four months ending December 31, 2016, for two alternatives: weaving
the place mats in cotton using the existing loom and weaving the place mats in linen using the new
loom. For each alternative, prepare a budgeted income statement for the four months ending
December 31, 2016, and a budgeted balance sheet at December 31, 2016.
2. On the basis of financial considerations only, what should Magnuson do? Give your reason.
3. What nonfinancial factors might Magnuson consider in her decision?
SOLUTION
Requirement 1
Cash Budget—Alternative 1: Weave place mats in cotton using existing loom.
ANNE MAGNUSON, WEAVER
Cash Budget
For the Four Months Ending December 31, 2016
Beginning cash balance
$ 25
Cash receipts from the local craft shop [25 sets × {$20/set – (10% × $20/set)}]
Cash available
Cash payments:
Accounts Payable balance August, 31, 2014
Ending cash balance
$ 401
ANNE MAGNUSON, WEAVER
Cash Budget
For the Four Months Ending December 31, 2016
Beginning cash balance
$ 25
Cash receipts from the local craft shop [15 sets × {$50/set – (10% × $50/set)}]
675
Cash available
700
Cash payments:
Accounts Payable balance August, 31, 2014
74
Purchases of linen (15 sets × $18/set)
270
Purchase of new loom
1,000
Interest expense ($1,000 × 18% × 4/12)
60
Total cash payments
1,404
Ending cash balance before financing
Financing:
Borrowing
1,000
Principal repayments
Total effects of financing
Ending cash balance
Decision Case 22-1, cont.
Requirement 1, cont.
Budgeted Income Statement—Alternative 1: Weave place mats in cotton using existing loom.
ANNE MAGNUSON, WEAVER
Budgeted Income Statement
For the Four Months Ending December 31, 2016
Sales Revenue (25 sets × $20/set)
$ 500
Cost of Goods Sold (25 sets × $7/set)
Gross Profit
Operating Expenses:
Sales Commission (10% of sales)
$ 50
Depreciation Expense (4 months × $10/month)
Total Operating Expenses
Net Income
$ 235
Budgeted Income Statement—Alternative 2: Weave place mats in linen using new loom.
ANNE MAGNUSON, WEAVER
Budgeted Income Statement
For the Four Months Ending December 31, 2016
Sales Revenue (15 sets × $50/set)
$ 750
Cost of Goods Sold (15 sets × $18/set)
Gross Profit
Operating Expenses:
Sales Commission (10% of sales)
$ 75
Depreciation Expense [($10/mth. × 4 mths.) + ($20/mth. × 4 mths.)]
Total Operating Expenses
Operating Income
Net Income
$ 225
Decision Case 22-1, cont.
Requirement 1, cont.
Budgeted Balance Sheet—Alternative 1: Weave place mats in cotton using existing loom.
ANNE MAGNUSON, WEAVER
Budgeted Balance Sheet
December 31, 2016
Assets
Current Assets:
Cash
$ 401
Property, Plant, and Equipment:
Loom
500
Less: Accumulated Depreciation ($240 + $40)
Total Assets
$ 621
$ 0
$ 621
Budgeted Balance Sheet—Alternative 2: Weave place mats in linen using new loom.
ANNE MAGNUSON, WEAVER
Budgeted Balance Sheet
December 31, 2016
Assets
Current Assets:
Cash
$ 96
Inventory of Cotton
175
Total Current Assets
$ 271
Property, Plant, and Equipment:
Looms ($500 + $1,000)
1,500
Less: Accumulated Depreciation ($240 + $120)
1,140
Total Assets
$ 1,411
Current Liabilities:
Note Payable ($1,000 – $200)
Total Liabilities and Stockholders’ Equity
$ 1,411
Decision Case 22-1, cont.
Requirement 2
Based on financial considerations only for the four months ended December 31, 2016, Magnuson should
Requirement 3
Nonfinancial factors Magnuson might consider include a preference she may have, as a weaver, to work
Ethical Issue 22-1
Southeast Suites operates a regional hotel chain. Each hotel is operated by a manager and an assistant
manager/controller. Many of the staff who run the front desk, clean the rooms, and prepare the breakfast
buffet work part time or have a second job, so employee turnover is high.
Assistant manager/controller Terry Dunn asked the new bookkeeper to help prepare the hotel’s master
budget. The master budget is prepared once a year and is submitted to company headquarters for
approval. Once approved, the master budget is used to evaluate the hotel’s performance. These
performance evaluations affect hotel managers’ bonuses, and they also affect company decisions on
which hotels deserve extra funds for capital improvements.
When the budget was almost complete, Dunn asked the bookkeeper to increase amounts budgeted for
labor and supplies by 15%. When asked why, Dunn responded that hotel manager Clay Murry told her
to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him
flexibility in running the hotel. For example, because company headquarters tightly controls capital
improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken
televisions or pay “bonuses” to keep valued employees. Dunn initially accepted this explanation because
she had observed similar behavior at the hotel where she worked previously.
Requirements
Put yourself in Dunn’s position. In deciding how to deal with the situation, answer the following
questions:
1. What is the ethical issue?
2. What are the options?
3. What are the possible consequences?
4. What should you do?
SOLUTION
Requirement 1
The new bookkeeper’s question requires Dunn, the hotel assistant manager/controller, to consider the
ethics of padding the budget (budgetary slack). Murry, the hotel manager, told Dunn to overstate, by
15%, the budgeted expense amounts for labor and supplies. The following are ethical issues to consider:
Requirement 2
Options include:
• Continue budgeting as in the past, for example, adding additional funds to the labor and supplies
budget.
Requirement 3
Possible consequences of each of the options listed in Requirement 2 include the following.
• Continue budgeting as in the past: This avoids a possible confrontation with Murry. The hotel will
continue to operate as before; however, Dunn’s integrity is compromised. Dunn may rationalize this
alternative if she decides to observe how Murry uses the budgetary slack over the next year. In
effect, Dunn is waiting to gather more information. However, if headquarters managers uncover the
intentionally inflated expenses, they may reject this year’s budget.
Ethical Issue 22-1, cont.
Requirement 4
Given the uncertainty over Murry’s motivation and the company’s position, decisions will depend on
Fraud Case 22-1
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?
SOLUTION
Requirement 1
Patrick’s actions are considered fraudulent because he is stealing inventory from his employer, McGill’s
Requirement 2
Companies can implement internal control procedures to help protect against this kind of business risk.
Requested changes in budgeted amounts should be justified. When Patrick increased the amount for