Western State University

Western State University (WSU) is preparing its master budget for the upcoming academic year. Currently, 16,000 students are enrolled on campus; however, the admissions office is forecasting a 7 percent growth in the student body despite a tuition hike to $80 per credit hour. The following additional information has been gathered from an examination of university records and conversations with university officials: 

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WSU is planning to award 190 tuition-free scholarships. The average class has 20 students, and the typical student takes 10 credit hours each semester. Each class is two credit hours. WSU’s faculty members are evaluated on the basis of teaching,

research, and university and community service. Each faculty member teaches five classes during the academic year. Required: 1. Prepare a tuition revenue budget for the upcoming academic year. 2. Determine the number of faculty members needed to cover classes. 3. Assume there is a shortage s hortage of full-time faculty members. Select at least five

actions that WSU might take to accommodate the growing student body by selecting an "X" next to the action. 4. You have been requested by the university’s administrative vice president (AVP) to construct budgets for other areas of operation (e.g., the library, grounds, dormitories, and maintenance). The AVP noted: “The most important resource of the university is its faculty. Now that you know the number of faculty needed, you can prepare the other budgets. Faculty members are indeed the key driver —without them we don’t operat operat e.” e.” Are faculty members a key driver in preparing budgets? Explanation 1.

Tuition revenue budget: Increase in student body = 16,000 × 7% = 1,120 2.

Faculty needed to cover classes: Total student body 17,120 Classes per student per year [(10 credit × 10 hours ÷ 2 credit hours) × 2 semesters] Total student class enrollments to be covered 171,200 Students per class ÷ 20 Classes to be taught 8,560 Classes taught per professor ÷ 5

Faculty needed

1,712

4.

No. While the number of faculty may be a key driver, the number of faculty is highly dependent on the number of students. Students (and tuition revenue) are akin to sales —the starting point in the budgeting process.

2)

Mary and Kay, Inc., a distributor of cosmetics throughout Florida, is in the process of assembling a cash budget for the first quarter of 20x1. The following information has been extracted from the company’s accounting

records: All sales are on account. Sixty percent of customer accounts are collected in the month of sale; 30 percent are collected in the following month. Uncollectibles amounting to 10 percent of sales are anticipated, and management believes that only 20 percent of the accounts outstanding on December 31, 20x0, will be recovered and that the recovery will be in January 20x1. Sixty percent of the merchandise purchases are paid for in the month of purchase; the remaining 40 percent are paid for in the month after acquisition. The December 31, 20x0, balance sheet disclosed the following selected figures: cash, $50,000; accounts receivable, $170,000; and accounts payable, $67,000. Mary and Kay, Inc. maintains a $50,000 minimum cash balance at all times. Financing is available (and retired) in $1,000 multiples at an 9 percent interest rate, with borrowings taking place at the beginning of the month and repayments occurring at the end of the month. Interest is paid at the time of repaying principal and computed on the portion of principal repaid at that time. Additional data: 

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Sales revenue Merchandise purchases Cash operating costs Proceeds from sale of equipment

January $460,000 280,000 94,000

February $550,000 310,000 73,000

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March $565,000 430,000 136,000 16,000

Required: 1. Prepare a schedule that discloses the firm’s total cash collections for

January through March. 2. Prepare a schedule that discloses the firm’s total cash disbursements for January through March. 3. Prepare a schedule that summarizes the firm’s financing cash flows for January through March. Explanation 1.

Schedule of cash collections: Collection of accounts receivable: $170,000 × 20% = $34,000 Collection of January sales ($460,000): 60% in January; 30% in February = $276,000; $138,000 Collection of February sales ($550,000): 60% in February; 30% in March = $330,000; $165,000 Collection of March sales ($565,000): 60% in March; 30% in April = $339,000 2.

Schedule of cash disbursements: Payment of January purchases ($280,000): 60% in January; 40% in February = $168,000; $112,000 Payment of February purchases ($310,000): 60% in February; 40% in March = $186,000; $124,000 Payment of March purchases ($430,000): 60% in March; 40% in April = $258,000 3.

Loan interest paid in February: $19,000 × 9% × 2/12 = $285

3)

Badlands, Inc. manufactures a household fan that sells for $25 per unit. All sales are on account, with 30 percent of sales collected in the month of sale and 70 percent collected in the following month. The data that follow were extracted from the company’s accounting records.

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Badlands maintains a minimum cash balance of $20,000. Total payments in January 20x1 are budgeted at $220,000. A schedule of cash collections for January and February of 20x1 revealed the following receipts for the period: Cash Receipts January February From December 31 accounts receivable

$126,000

From January sales From February sales

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87,000 $133,000 75,000

March 20x1 sales are expected to total 8,500 units. Finished-goods inventories are maintained at 30 percent of the following month’s sales.

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The December 31, 20x0, balance sheet revealed the following selected figures: cash, $23,600; accounts receivable, $126,000; and finished goods, $24,000.

Required: 1. Determine the number of units that Badlands sold in December 20x0. 2. Compute the sales revenue for March 20x1. 3. Compute the total sales revenue to be reported on Badlands’ budgeted 4. 5. 6. 7.

income statement for the first quarter of 20x1. Determine the accounts receivable balance to be reported on the March 31, 20x1, budgeted balance sheet. Calculate the number of units in the December 31, 20x0, finished-goods inventory. Calculate the number of units of finished goods to be manufactured in January 20x1. Calculate the financing required in January, if any, to maintain the firm’s minimum cash balance.

Explanation 1.

Sales are collected over a two-month period, 30% in the month of sale and 70% in the following month. December receivables of $126,000 equal 70% of De cember’s sales; thus, December sales total $180,000 ($126,000 ÷ 0.7). Since the selling price is $25 per unit, Badlands sold 7,200 units ($180,000 ÷ $25). 2.

Since the company expects to sell 8,500 units, sales revenue will total $212,500 (8,500 units × $25). 3.

Badlands collected 30% of February’s sales in February, or $75,000. Thus, February’s sales total $250,000 ($75,000 ÷ 0.30). Combining January sales ($87,000 + $133,000), February sales ($250,000), and March sales ($212,500), the company will report revenue of $682,500. 4.

Seventy percent of March’s sales will be outstanding, or $148,750 ($212,500 × 70%). 5.

Finished-goods inventories are maintained at 30% of the following month’s sales. January sales total $220,000 ($87,000 + $133,000), or 8,800 units ($220,000 ÷ $25). Thus, the December 31 inventory

is 2,640 units (8,800 × 30%). 6.

February sales will total 10,000 units ($250,000 ÷ $25), giving rise to a January 31 inventory of 3,000 units (10,000 × 30%). Letting X denote production, then: 12/31/x0 inventory + X – January 20x1 sales = 1/31/x1 inventory 2,640 + X – 8,800 = 3,000 X – 6,160 = 3,000 X = 9,160

7.

Financing required is $3,400 ($20,000 minimum balance – $16,600 ending balance):

Cash balance, January 1 $ 23,600 Add: January receipts ($126,000 + $87,000) 213,000 Subtotal $236,600 Less: January payments 220,000 Cash balance before financing

$ 16,600

4)

Alpha-Tech, a rapidly growing distributor of electronic components, is formulating its plans for 20x5. Carol Jones, the firm’s marketing director, has completed the following sales forecast. ALPHA-TECH 20x5 Forecasted Sales (in thousands) Month Sales January $ 7,000 February 8,000 March 7,000 April 9,500 May 10,500 June 12,000 July 13,000 August 13,000 September 14,000 October 14,000 November 13,000 December 15,000

Phillip Smith, an accountant in the Planning and Budgeting Department, is responsible for preparing the cash flow projection. The following information will be used in preparing the cash flow projection.

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Alpha-Tech’s excellent record in accounts receivable collection is expected to continue. Sixty percent of billings are collected the month after the sale, and the remaining 40 percent two months after. The purchase of electronic components is Alpha-Tech’s largest expenditure, and each month’s cost of goods sold is estimated to be 30 percent of sales. Seventy percent of the parts are received by AlphaTech one month prior to sale, and 30 percent are received during the month of sale. Historically, 70 percent of accounts payable has been paid one month after receipt of the purchased components, and the remaining 30 percent has been paid two months after receipt. Hourly wages and fringe benefits, estimated to be 30 percent of the current month’s sales, are paid in the month incurred.

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General and administrative expenses are projected to be $16,170,000 for the year. The breakdown of these expenses is presented in the following schedule. All cash expenditures are paid uniformly throughout the year, except the property taxes, which are paid in four equal installments at the end of each quarter. 20x5 Forecasted General and Administrative Costs (in thousands) Salaries and fringe benefits $ 3,200 Promotion 4,300 Property taxes 1,480 Insurance 1,680 Utilities 1,500 Depreciation 4,010 Total

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$

16,170

Income-tax payments are made at the beginning of each calendar quarter based on the income of the prior quarter. Alpha-Tech is subject to an income-tax rate of 40 percent. Alpha-Tech’s operating income for the first quarter of 20x5 is projected to be $4,000,000. The company pays 100 percent of the estimated tax payment.

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Alpha-Tech maintains a minimum cash balance of $515,000. If the cash balance is less than $515,000 at the end of each month, the company borrows amounts necessary to maintain this balance. All amounts borrowed are repaid out of the subsequent positive cash flow. The projected April 1, 20x5, opening balance is $515,000. Alpha-Tech has no short-term debt as of April 1, 20x5. Alpha-Tech uses a calendar year for both financial reporting and tax purposes.

Required: 1. Prepare a cash budget for Alpha-Tech by month for the second quarter of

20x5. For simplicity, ignore any interest expense associated with borrowing. (Negative amounts should be indicated by a minus sign.) Explanation Collections: 60% of sales in first month after sale;40% of sales in second month after sale. Accounts payable Total* Cost of goods sold: February March March April April May May June

$2,400,000 2,100,000 2,100,000 2,850,000 2,850,000 3,150,000 3,150,000 3,600,000

Percentage

0.30 0.70 0.30 0.70 0.30 0.70 0.30 0.70

February

$

April

720,000 1,470,000 $ 630,000 1,995,000 $ 855,000 2,205,000 $

$2,190,000 Payments: February $2,190,000 March 2,625,000 March 2,625,000 April 3,060,000 April 3,060,000 May 3,465,000

March

$2,625,000

0.30 0.70 0.30 0.70 0.30 0.70

$3,060,000

$

$3,4

657,000 1,837,500 $

$

0

$

0

9 2,5

$2,494,500

*For cost of goods sold, this amount is equal to 30% of sales. For payments, this amount is equal to the cost of goods sold.

7 2,1

$2,9

Wages 30% of current month sales. General and administrative (Total, less property taxes and depreciation) divided by 12. Income taxes 40% × $4,000,000. 5)


records: All sales are on account. Sixty percent of customer accounts are collected in the month of sale; 35 percent are collected in the following month. Uncollectibles amounting to 5 percent of sales are anticipated, and management believes that only 20 percent of the accounts outstanding on December 31, 20x0, will be recovered and that the recovery will be in January 20x1. Seventy percent of the merchandise purchases are paid for in the month of purchase; the remaining 30 percent are paid for in the month after acquisition. The December 31, 20x0, balance sheet disclosed the following selected figures: cash, $90,000; accounts receivable, $245,000; and accounts payable, $82,000. Mary and Kay, Inc. maintains a $90,000 minimum cash balance at all times. Financing is available (and retired) in $1,000 multiples at an 9 percent interest rate, with borrowings taking place at the beginning of the month and repayments occurring at the end of the month. Interest is paid at the time of repaying principal and computed on the portion of principal repaid at that time. Additional data: 

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Sales revenue Merchandise purchases Cash operating costs Proceeds from sale of equipment

Required:

January $610,000 430,000 109,000

February $700,000 460,000 88,000

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March $715,000 580,000 151,000 31,000

1. Prepare a schedule that discloses the firm’s total cash collections for




Loan interest paid in February: $77,000 × 9% × 2/12 = $1,155

6)


records: All sales are on account. Sixty percent of customer accounts are collected in the month of sale; 35 percent are collected in the following month. Uncollectibles amounting to 5 percent of sales are anticipated, and management believes that only 20 percent of the accounts outstanding on December 31, 20x0, will be recovered and that the recovery will be in January 20x1. Seventy percent of the merchandise purchases are paid for in the month of purchase; the remaining 30 percent are paid for in the month after acquisition. The December 31, 20x0, balance sheet disclosed the following selected figures: cash, $100,000; accounts receivable, $255,000; and accounts payable, $84,000. Mary and Kay, Inc. maintains a $100,000 minimum cash balance at all times. Financing is available (and retired) in $1,000 multiples at an 8 

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percent interest rate, with borrowings taking place at the beginning of the month and repayments occurring at the end of the month. Interest is paid at the time of repaying principal and computed on the portion of principal repaid at that time. Additional data: Sales revenue Merchandise purchases Cash operating costs Proceeds from sale of equipment

January $630,000 450,000 111,000

February $720,000 480,000 90,000

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March $735,000 600,000 153,000 33,000

Required: 1. Prepare a schedule that discloses the firm’s total cash collections for




Loan interest paid in February: $81,000 × 8% × 2/12 = $1,080

Western State University

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