We continue the budgeting process for Greg’s Games by preparing the capital expenditures budget, cash budget, and budgeted financial statements—budgeted income statement and budgeted balance sheet.
Capital Expenditures Budget
The capital expenditures budget estimates the purchases of property, plant, and equipment.
Greg’s Games plans to purchase a used delivery truck in April, paying $3,000 at the time of the purchase. Because this is the only capital expenditure, a separate budget is not illus- trated. The cash payment will be shown on the cash budget.
Learning Objective 6 Prepare a financial budget for a
merchandising company
Cash Budget
The cash budget estimates the cash receipts and cash payments for the time period. This budget pulls information from the other budgets previously prepared and has three sec- tions: cash receipts, cash payments, and short-term financing.
Cash Receipts
The primary source of cash is from customers. The sales budget illustrated in Exhibit 22-21 shows the total sales for the period. Recall that the company’s sales are 60% cash and 40%
on credit. The 40% credit sales are collected the month after the sale is made. Exhibit 22-24 shows that April’s budgeted cash collections consist of two parts:
1. April’s cash sales from the sales budget in Exhibit 22-21 ($30,000)
2. Collections of March’s credit sales ($16,000 Accounts Receivable from the March 31 balance sheet, Exhibit 22-20).
This process is repeated for all four months.
Exhibit22-24 | Schedule of Cash Receipts from Customers
Cash sales (60%)
April May June July Total
Credit sales receipts, one month after sale (40%)
Total cash receipts $ 68,000 $ 68,000 $ 54,000 $ 236,000
$ 30,000 $ 144,000
$ 46,000
20,000
$ 48,000
32,000
$ 36,000 $ 30,000
24,000 92,000 GREG’S GAMES
Budgeted Cash Receipts from Customers Four Months Ended July 31, 2020
Accounts Receivable balance, July 31:
July sales on account to be collected in August, $20,000
16,000*
* March 31 Accounts Receivable (Exhibit 22-20)
Cash Payments
Greg’s Games pays for merchandise inventory purchases 50% during the month of pur- chase and 50% the month after purchase. Use the inventory, purchases, and cost of goods sold budget from Exhibit 22-22 to compute budgeted cash payments for purchases of inventory. April’s cash payments for purchases consist of two parts:
1. Payment of 50% of March’s purchases ($16,800 Accounts Payable balance from the March 31 balance sheet, Exhibit 22-20).
2. Payment for 50% of April’s purchases (50% * $51,800 = $25,900).
Use the selling and administrative expense budget (Exhibit 22-23) and Greg’s Games payment information to compute cash payments for selling and administrative expenses.
Greg’s Games pays half the salaries and commissions in the month incurred and half in the following month. Therefore, at the end of each month, Greg’s Games reports Salaries and Commissions Payable equal to half the month’s payroll. The $4,250 balance in Salaries and Commissions Payable in the March 31 balance sheet in Exhibit 22-20 is half the March payroll of $8,500:
March payroll = Salaries + Sales commissions of 15% of sales
= $2,500 + (15% * $40,000)
= $2,500 + $6,000
= $8,500
The company’s selling and administrative expenses also include $2,000 rent, $500 depreciation, $200 of insurance expense, and miscellaneous expenses of 5% of sales for the month. Greg’s Games pays all those expenses in the month incurred except for insurance and depreciation. Recall that the insurance was prepaid insurance, so the cash payment for insurance was made before this budget period; therefore, no cash payment is made for insurance during April–July. Depreciation is a non-cash expense, so it’s not included in the budgeted cash payments for selling and administrative operating expenses. April’s cash payments for selling and administrative expenses consist of the following items:
Payment of 50% of March’s salaries ($2,500 * 50%)
(from March 31 balance sheet, Exhibit 22-20) $ 1,250 Payment of 50% of March’s commissions ($6,000 * 50%)
(from March 31 balance sheet, Exhibit 22-20) 3,000
Payment of 50% of April’s salaries ($2,500 * 50%) (Exhibit 22-23) 1,250 Payment of 50% of April’s commissions ($7,500 * 50%) (Exhibit 22-23) 3,750
Payment of Rent Expense (Exhibit 22-23) 2,000
Payment of Miscellaneous Expenses (Exhibit 22-23) 2,500 Total April cash payments for S&A Expenses $ 13,750
Why are depreciation expense and insurance expense from the selling and administrative expense budget excluded from the budgeted cash payments for selling and administrative expenses?
Exhibit22-25 | Schedule of Cash Payments for Purchases
50% of last month’s purchases
April May June July Total
50% of this month’s purchases Total cash payments for purchases
Accounts Payable balance, July 31:
50% of July purchases to be paid in August, $14,700
$ 48,300 $ 40,600 $ 32,900 $ 164,500
$ 16,800* $ 83,300
$ 42,700
25,900 22,400
$ 25,900
18,200
$ 22,400 $ 18,200
14,700 81,200 GREG’S GAMES
Budgeted Cash Payments for Purchases Four Months Ended July 31, 2020
* March 31 Accounts Payable (Exhibit 22-20)
This process is repeated for all four months and is illustrated in Exhibit 22-25.
Short-term Financing
Greg’s Games requires a minimum cash balance of $10,000 at the end of each month. The store can borrow cash in $1,000 increments at an annual interest rate of 12%. Management borrows no more than the amount needed to maintain the $10,000 minimum ending cash balance. Total interest expense will vary as the amount of borrowing varies from month to month. Notes payable require $1,000 installment payments of principal per month, plus monthly interest on the unpaid principal balance. This is an installment loan; therefore, payments of principal are $1,000 per month even if there is additional excess cash on hand.
Borrowing and all principal and interest payments occur at the end of the month.
Now that we have compiled the information needed for cash receipts and cash pay- ments, we are now ready to prepare the cash budget. Start with the beginning cash balance from the March 31 balance sheet (Exhibit 22-20) and add the budgeted cash receipts (Exhibit 22-24) to determine the cash available. Then subtract cash payments for purchases (Exhibit 22-25), selling and administrative expenses (Exhibit 22-26), and any capital expen- ditures. This yields the ending cash balance before financing. Exhibit 22-27 (on the next page) shows the partially completed cash budget.
Exhibit22-26 | Schedule of Cash Payments for Selling and Administrative Expenses
Variable expenses:
April May June July Total
50% of last month’s Commissions Expense 50% of this month’s Commissions Expense Miscellaneous Expenses
Total payments for variable expenses Fixed expenses:
50% of last month’s Salaries Expense 50% of this month’s Salaries Expense Rent Expense
Total payments for fixed expenses Total payments for S&A expenses
$ 3,000
2,500 4,000 3,000 2,500 12,000
3,750 9,250 1,250 1,250 2,000
4,500 4,500 4,500 4,500 18,000
$ 13,750 $ 18,250 6,000
13,750 13,500 10,750 47,250
1,250 1,250
1,250 1,250
2,000 1,250
5,000 5,000 8,000 1,250
2,000 2,000
$ 18,000 $ 15,250 $ 65,250
$ 3,750 $ 6,000
4,500 3,750 18,000
$ 4,500 $ 17,250 GREG’S GAMES
Budgeted Cash Payments for Selling and Administrative Expenses Four Months Ended July 31, 2020
Salaries and Commissions Payable balance, July 31:
50% of July salaries and commissions to be paid in August, $5,000
Exhibit 22-26 shows the schedule of cash payments for selling and administrative expenses for Greg’s Games.
Notice that in Exhibit 22-27 April’s $2,950 budgeted cash balance before financing falls $7,050 short of the minimum required ($10,000 - $2,950). To be able to access short- term financing, Greg’s Games secured a line of credit with the company’s bank. Securing this credit in advance is crucial to having the credit available to draw upon when cash short- ages arise. Because Greg’s Games borrows in $1,000 increments, the company will have to borrow $8,000 to cover April’s expected shortfall. The budgeted ending cash balance equals the “ending cash balance before financing,” adjusted for the total effects of the financing (an $8,000 inflow in April). Exhibit 22-28 shows that Greg’s Games expects to end April with $10,950 of cash ($2,950 + $8,000).
Additionally, the amount borrowed is to be paid back in $1,000 installments plus inter- est at 12% annually. Note that in May, the company begins to pay the $8,000 borrowed in April. Greg’s Games must also pay interest at 12%. For May, the interest paid is calculated as
$8,000 owed * 12% per year * 1/12 of the year, or $80 interest. For June, the company’s interest owed will change because the principal of the note has been paid down by $1,000 in May.
June interest is calculated as ($8,000 - $1,000) owed * 12% per year * 1/12 of the year, or
$70 interest. For July, interest is ($8,000 - $1,000 - $1,000) owed * 12% per year * 1/12 of the year, or $60 interest. Exhibit 22-28 shows the completed cash budget for April, May, June, and July.
Exhibit22-27 | Cash Budget
Beginning cash balance
April May June July Total
Cash receipts Cash available Cash payments:
Capital expenditures
Purchases of merchandise inventory Selling and administrative expenses Interest expense
Minimum cash balance desired Financing:
Borrowing
Projected cash excess (deficiency)
Principal repayments Ending cash balance Total effects of financing
(10,000) (10,000) (10,000) (10,000)
$ 16,400 $ 16,400
59,450 2,950 (10,000)
(7,050) 46,000 62,400 3,000 42,700 13,750 0
0 0 0 3,000
48,300 40,600 32,900 164,500
18,250 18,000 15,250 65,250
68,000 68,000 54,000 236,000
GREG’S GAMES Cash Budget
Four Months Ended July 31, 2020
Total cash payments
Ending cash balance before financing
The cash balance at the end of July of $24,440 is the Cash balance on the July 31 budgeted balance sheet.
Budgeted Income Statement
The budgeted financial statements are the next step in the budgeting process. Following is a summary of the sources for the budgeted income statement:
Account Budget Exhibit Amount
Sales Revenue Sales 22-21 $240,000
Cost of Goods Sold Inventory, Purchases, and Cost of Goods Sold 22-22 168,000 S&A Expenses Selling and Administrative Expense 22-23 68,800
Interest Expense Cash 22-28 210
Exhibit 22-29 (on the next page) shows the budgeted income statement for Greg’s Games.
Exhibit22-28 | Completed Cash Budget
Beginning cash balance
April May June July Total
Cash receipts Cash available Cash payments:
Capital expenditures
Purchases of merchandise inventory Selling and administrative expenses Interest expense
Minimum cash balance desired Financing:
Borrowing
Projected cash excess (deficiency)
Principal repayments Ending cash balance Total effects of financing
66,630 58,670 20,650 10,650
(1,000) (1,000)
(1,000) (1,000)
(3,000) 5,000
15,440 9,440
8,000 25,440
48,210 232,960 19,440 12,320
2,320
(1,000) (1,000)
$ 11,320 $ 19,650 $ 24,440 $ 24,440 (10,000) (10,000) (10,000) (10,000)
$ 16,400 $ 16,400
59,450
8,000 8,000
$ 10,950 2,950 (10,000)
(7,050) 46,000 62,400 3,000 42,700 13,750 0
0 0 0 3,000
48,300 40,600 32,900 164,500
18,250 18,000
70 60
15,250 65,250 210 80
68,000
$ 10,950 78,950
68,000
$ 11,320 $ 19,650 73,650 79,320
54,000 236,000 252,400 GREG’S GAMES
Cash Budget
Four Months Ended July 31, 2020
Total cash payments
Ending cash balance before financing
Budgeted Balance Sheet
The budgeted balance sheet will pull amounts from the various budgets previously com- pleted. One remaining calculation is for Retained Earnings. Retained Earnings is increased by the amount of net income earned and decreased by the amount of dividends declared.
The net income is shown in Exhibit 22-29 and the company does not project any dividends.
Following is a summary of the sources for the balance sheet figures:
Exhibit22-29 | Budgeted Income Statement
12,000
210
$ 2,990 168,000 72,000
$ 36,000
$ 240,000 GREG’S GAMES
Budgeted Income Statement Four Months Ended July 31, 2020 Sales Revenue
Cost of Goods Sold Gross Profit
Selling and Administrative Expenses:
Commissions Expense
Salaries Expense Rent Expense Depreciation Expense Miscellaneous Expense
Total Selling and Administrative Expenses Operating Income
Interest Expense
10,000 8,000
68,800 3,200 Insurance Expense
Net Income
2,000 800
Account Source Exhibit Amount
Cash Cash budget 22-28 $24,440
Accounts Receivable Schedule of cash receipts from customers 22-24 20,000 Merchandise Inventory Inventory, purchases, and COGS budget 22-22 42,400
Prepaid Insurance March 31 balance sheet 22-20 1,800
S&A expense budget 22-23 800
Equipment and Fixtures March 31 balance sheet 22-20 32,000
Capital expenditures budget 3,000
Accumulated Depreciation March 31 balance sheet 22-20 12,800
S&A expense budget 22-23 2,000
Accounts Payable Schedule of cash payments for purchases 22-25 14,700 Salaries and Commissions Payable Schedule of cash payments for S&A expenses 22-26 5,000
Notes Payable Cash budget 22-28 5,000
Common Stock March 31 balance sheet 22-20 20,000
Retained Earnings March 31 balance sheet 22-20 60,350
Budgeted income statement 22-29 2,990
Study the budgeted balance sheet in Exhibit 22-30 to make certain you understand the computation of each figure.
Exhibit22-30 | Budgeted Balance Sheet
83,340
$ 108,040
$ 24,440 42,400 1,000 20,000
5,000 5,000
$ 87,840 GREG’S GAMES
Budgeted Balance Sheet July 31, 2020
Assets Current Assets:
Cash
Accounts Receivable Merchandise Inventory
Prepaid Insurance ($1,800 − $800) Total Current Assets
Property, Plant, and Equipment:
Equipment and Fixtures ($32,000 + $3,000) Less: Accumulated Depreciation ($12,800 + $2,000) Total Assets
Current Liabilities:
Total Liabilities
Notes Payable—Short-term Salaries and Commissions Payable Accounts Payable
Stockholders’ Equity Common Stock, no par
Retained Earnings ($60,350 + $2,990) Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
35,000
63,340 20,000
(14,800) 20,200
$ 108,040
$ 24,700 Liabilities
$ 14,700
Try It!
15. Connor Co.mpany began operations on January 1 and has projected the following selling and administrative expenses:
Rent Expense $ 1,000 per month, paid as incurred
Utilities Expense 500 per month, paid in month after incurred Depreciation Expense 300 per month
Insurance Expense 100 per month, 6 months prepaid on January 1