Reference no: EM133342276
Case: Nomad Vineyards Inc. (Nomad) is a wholesale distributor of imported wine that commenced operations in 20Y1. Ethan is the president of Nomad and has just hired you as a consultant to help him prepare monthly budgets for the upcoming year, 20Y2. For simplicity, prepare monthly budgets for only the first half of the year, January 1 through June 30, 20Y2.
Ethan has made some sales forecasts for 20Y2. He expects monthly sales to start at $400,000 in January and then grow $20,000 per month during the first half of the year, as follows:
| Sales revenue, 20Y1 |
|
Budgeted sales revenue, 20Y2 |
|
| October |
$330,000 |
|
January |
$400,000 |
|
April |
$460,000 |
| November |
$355,000 |
|
February |
$420,000 |
|
May |
$480,000 |
| December |
$380,000 |
|
March |
$440,000 |
|
June |
$500,000 |
| |
|
|
|
|
|
July |
$520,000 |
| |
|
|
|
|
|
|
|
|
All inventory sales are made on account. Nomad collects 20% of its receivables in the month of the sale and 80% in the following month. Uncollectible accounts were negligible in 20Y1 and no bad debts are expected in 20Y2. Nomad's only cash receipts are from inventory sales.
All merchandise inventory purchases are made on account. Nomad pays 30% of its payables in the month of the purchase and 70% in the following month. Nomad's gross profit percentage is 40% and its cost of goods sold percentage is 60%. Nomad maintains an ending inventory balance (safety stock) equal to 50% of the cost of goods sold in the following month. Inventory purchases in December 20Y1 were $234,000.
Nomad's monthly selling and administrative (S&A) expenses include variable costs equal to 5% of sales revenue and fixed costs of $70,000. The variable S&A expenses are sales commissions, whereas the fixed S&A expenses include rent, advertising, salaries, insurance, and depreciation. All S&A expenses are paid in cash in the month the expense is incurred, except for monthly depreciation expense of $10,000 and monthly insurance expense of $3,000. Nomad paid its annual insurance premium for 20Y2 of $36,000 on December 31, 20Y1.
Ethan has established a capital expenditure budget for 20Y1. The plan is to acquire $75,000 of new property, plant and equipment (PP&E) at the start of each quarter, including January 20Y2 and April 20Y2. Nomad pays dividends semi-annually in January and July. In December 20Y1, Nomad declared a $50,000 dividend which is payable in January 20Y2. Nomad's accountant estimates that its income tax liability for 20Y2 will be $260,000 (tax rate of roughly 25%). Consequently, Nomad will make four quarterly estimated income tax payments of $65,000 each on April 15, June 15, September 15 and December 15 of 20Y2.
Nomad's balance sheet on December 31, 20Y1 is as follows:
| Assets |
| Cash |
$ 124,000 |
| Accounts receivable [a] |
304,000 |
| Inventory |
120,000 |
| Prepaid insurance |
36,000 |
| PP&E, net of accumulated depreciation |
796,000 |
| Total assets |
$1,380,000 |
| Liabilities and Stockholders' Equity |
| Accounts payable [b] |
$ 163,800 |
| Dividends payable |
50,000 |
| Common stock |
1,000,000 |
| Retained earnings |
166,200 |
| Total liabilities & stockholders' equity |
$1,380,000 |
[a] Nomad will collect the entire balance in January 20Y2
[b] Nomad will pay off the entire balance in January 20Y2
Required
Prepare monthly budgets for the first six months of 20Y2, including the following detailed schedules:
1- Sales budget and expected cash collections from inventory sales
2- Merchandise purchases budget and expected cash payments for inventory purchases
3- S&A expenses budget and expected cash payments for S&A expenses
4- Cash budget
5- Budgeted income statement for six months ending June 30, 20Y2
6- Budgeted balance sheet on June 30, 20Y2
7-Budgeted statement of cash flows for six months ending June 30, 20Y2