Delta Company Products, a rapidly growing distributor of home gardening equipment, is formulating its plans for 2014.
Question:
Delta Company Products, a rapidly growing distributor of home gardening equipment, is formulating its plans for 2014. Jewel Cairn, the firm’s marketing director, has completed the following sales forecast. Johansson, an accountant in the Planning and Budgeting Department, is responsible for preparing the cash flow projection. He has gathered the following information.
1. All sales are made on credit.
2. Delta Company's excellent record in accounts receivable collection is expected to continue, with 70 percent of billings collected in the month after sale and the remaining 30 percent collected two months after the sale. Variable Overhead Budget Annual Budget Per Shirt
November— Actual Indirect materials AFN 450,000 AFN 0.45 AFN 36,000
Indirect labor 300,000 0.30 33,700
Equipment repair 200,000 0.20 16,400
Equipment power 50,000 0.05 12,300
Total AFN 1,000,000 AFN 1.00 AFN 98,400
Month Sales Month Sales
January $ 900,000 July $1,500,000 February $1,000,000 August $1,500,000 March $ 900,000 September $1,600,000 April $1,150,000 October $1,600,000 May $1,250,000 November $1,500,000 June $1,400,000 December $1,700,000
3. Cost of goods sold, Delta Company largest expense, is estimated to equal 45 percent of sales dollars. Seventy percent of inventory is purchased one month prior to sale and 30 percent during the month of sale. For example, in April, 30 per-cent of April cost of goods sold is purchased and 70 percent of the May cost of goods sold is purchased.
4. All purchases are made on the account. Historically, 80 percent of accounts payable have been paid during the month of purchase, and the remaining 20 percent in the month following purchase.
5. Hourly wages and fringe benefits, estimated at 30 percent of the current month’s sales, are paid in the month incurred.
6. General and administrative expenses are projected to be $1,550,000 for the year. A breakdown of the expenses follows. All expenditures are paid monthly throughout the year, with the exception of property taxes, which are paid in four equal installments at the end of each quarter.
Salaries and fringe benefits $ 324,000
Advertising 372,000
Property taxes 136,000
Insurance 192,000
Utilities 180,000
Depreciation 346,000
Total $1,550,000
Operating income for the first quarter of 2014 is projected to be $320,000. Delta Company is subject to a 40 percent tax rate. The company pays 100 percent of its estimated taxes in the month following the end of each quarter. Delta Company maintains a minimum cash balance of $50,000. If the cash
balance is less than $50,000 at the end of the month, the company borrows against its 6 percent line of credit in order to maintain the balance. All borrowings are made at the beginning of the month, and all repayments are made at the end of the month (in increments of $1,000). Accrued interest is paid in full with each principal repayment. The projected cash balance on April 1, 2014, is $80,000.
Requirement
1. Prepare the cash receipts budget for the second quarter of 2014.
2. Prepare the purchase budget for the second quarter of 2014.
3. Prepare the cash payments budget for the second quarter of 2014.
4. Prepare the cash budget for the second quarter of 2014.
Expert Answer:
