Preparing a Master Budget Essay Example

other items are $55,000 monthly. Assume that these variable and fixed expenses require cash disbursements each month. Depreciation is $2,500 monthly. In June, $55,000 is going to be disbursed for fixtures acquired and recorded in furniture and fixtures in May. The May 31 balance of accounts payable includes this amount. Assume that a minimum cash balance of $25,000 is to be maintained. Also assume that all borrowings are effective at the beginning of the month and all repayments are made at the end of the month of repayment.

Interest is compounded and added to the outstanding balance each month, but interest is paid only at the ends of months when principal is repaid. The interest rate is 10% per annum; round interest computations and interest payments to the nearest dollar. Interest payments may be any dollar amount, but all borrowing and repayments of principal are made in multiples of $1,000. 1. Prepare a budgeted income statement for the coming June through August quarter, a cash budget (for each of the next three months), and a budgeted balance sheet for August 31, 20X8.

All operations are evaluated on a before-income-tax basis, so income taxes may be ignored here. > 2. Explain why there is a need for a bank loan and what operating sources supply cash for repaying the bank loan. The main reason for the bank loan relates to June’s unique sales figures. To get enough volume to cover the projected June sales, the inventory had to be greatly expanded. This meant large inventory purchases all at once. Without enough cash on hand to pay for the inventory, a notes payable was the only solution.

The lack of cash came from the fact that June’s sales are so radically different from the ones that came before it.

Even with the minimum inventory amount gotten from the previous month, the huge jump in sales for the month of June could not be offset by the accounts receivable from previous months. With a sales projection almost twice the previous month and more than three times the lowest month, the shock to the system was so strong that it couldn’t be smoothly recovered from. The following months were fine, but only because of the large credit amount brought about by June’s sales. In fact, the large amount is what helped us begin to repay the note payable.