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COMPREHENSIVE BUDGETING PROBLEM
Cindy Smith has been a successful marketing executive for various consumer products companies. Having recently cashed out her stock options she is planning to quit her current position and realize her life-long dream of owning her own boutique to be called The White Rabbit. She has done some market research and is exploring arrangements with landlords suppliers etc. Her target date for opening is July 1 2014 and she would operate on a June 30 fiscal year.Even though she has personal funds available to invest it will still be necessary to obtain a bank loan for initial financing and she has had discussions with bank loan officers. Total financing needs are estimated to be $110000. First National Bank has indicated that they would be willing to make a loan equal to 50% of the long-term financing of the company with Cindy s owner s equity in the corporation (contributed capital) forming the other 50%. The note would be secured by the inventory and Cindy s personal guarantee. The loan will be taken out on June 1st. The company would be required to maintain a minimum cash balance of $5000 in an account at First National Bank. No principal payments would be required for the first three years but interest would be payable at .6% (six-tenths percent) per month. In order to qualify for the loan Cindy must provide the bank with monthly cash budgets and forecast annual financial statements for the first two fiscal years of operation.Cindy will operate the business as a sole proprietorship which does not constitute a separate taxable entity. Therefore income taxes can be disregarded.Cindy expects to rent a storefront in a strip mall. Rent would be $5700 per month payable in advance the first day of each month. In addition a $5000 deposit would be required upon signing of the lease on June 1 2014. Fixtures costing $24000 would be installed in June 2014 and paid for immediately. They would be depreciated on the straight-line method over 72 months starting July 1 with no salvage value.Cindy expects to keep two months worth of sales in inventory. In May she will order the merchandise expected to be sold in July and August. This will be received and stocked in June. Then expected September sales will be ordered in June to be received and stocked in July etc. According to her suppliers normal practices purchases are paid for 50% in the month received and 50% in the following month.Other information about operating expenses:Insurance:Cost is $3800 per year payable in advance (June).Telephone:$200 deposit required in June 2014. Monthly phone bill is expected to be $290.Payroll: Payroll costs are expected to be $5600 per month plus 10% in payroll taxes. It is assumed that all payroll costs are paid in the month incurred. Because of seasonality of the business payroll costs are expected to be 40% higher than normal in November and December and 20% higher in January. One-time payroll costs of $4000 for stocking and training will be incurred in June but not paid until July. These are to be treated as a July expense.Advertising:Advertising expense is expected to be $500/mo. with extra promotional expenses of $500 in each of November December and June. Cindy expects to spend $5000 in June of 2014 promoting her Grand Opening. These promotion costs will be paid in July and are to be treated as July expense.Miscellaneous:Miscellaneous expenses are expected to be $250/month starting in July.Sales are expected to be made as follows: 10% cash 30% check 60% credit cards. Credit card sales net of an average fee of 2% are received in the month of sale. Ten percent of the checks received are expected to be returned NSF. Of these half will never be collected and the other half will be collected on average in the third month following the sale (i.e. October for July sales). Fees charged to delinquent customers are expected to equal the costs of collection.Gross margin is expected to be 50% except that in January and June it will be 40% because of markdowns.Cindy expects the following monthly sales in thousands of dollars: 2014 2015 2016January 60 65February 22 23March 28 30April 43 47May 30 32June 45 50July 36 30 32August 17 21 22September 30 33 35October 23 25 26November 64 70 80December 59 65 70REQUIRED: Prepare the following (rounding all amounts to the nearest dollar):1. Monthly cash budgets for the first two fiscal years of operation. Note that for the first year it will be a 13-month budget including June of 2014.2. Forecast income statements for The White Rabbit Inc. for the first two fiscal years of operation. Expenses incurred in June 2014 are to be added to July s expenses for income statement purposes rather than preparing a separate income statement for June.3. Forecast balance sheets as of June 30 2015 and 2016.

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