CASE

The Cooking Hut Company (CHC), a local retailer of a wide variety of kitchen and dining room
items such as coffee makers, silverware, and tale linens would like you to help in the udgeting
process! The company rents a retail store in a midsi"eed community near #enver! CHC$s
management prepares a continuous udget to aid financial and operating decisions! %or
simplicity, the planning hori"on is only four months, April through &uly! 'n the past, sales have
increased during this season! However, the company$s collections have always lagged well
ehind its sales! As a result, the company has often found itself pressed to come up with cash
for purchases, employee wages, and other operating outlays! To help meet this cash s(uee"e,
CHC has used short)term loans from local anks, paying them ack when cash comes in! CHC
plans to keep on using this system!
E*hiit +), is the closing alance sheet for the fiscal year ending -arch ./, ,001! Sales in
-arch were 230,000! -onthly sales are forecasted as follows4 April 250,0006 -ay 270,0006
&une 280,0006 &uly 250,0006 August, 230,000! -anagement e*pects future sales collections to
follow past e*perience4 809 of the sales should e in cash and 309 on credit! All credit
accounts are collected in the month following the sales! :ncollectile accounts are negligile
and thus ignored! Also we will ignore all local, state, and federal ta*es for this case! ;ecause
deliveries from suppliers and customer demands are uncertain, at the end of each month, CHC
wants to have on hand a asic inventory of items valued at 2,0,000 plus 709 of the e*pected
cost of goods sold for the following month! The cost of merchandise sold averages +09 of
sales! The purchase terms availale to CHC are net, .0 days! CHC pays for each month$s
purchases as follows4 509 during that month and 509 during the ne*t month!
CHC pays wages and commissions semi monthly, half a month after they are earned! They are
divided into two portions4 monthly fi*ed wages of 2,,500 and commissions, e(ual to /59 of
sales, which we will assume are uniform throughout each month!
'n addition to uying new fi*tures for 2.,000 cash in April, CHC$s other monthly e*penses are as
follows4
-iscellaneous e*penses 59 of sales, paid as incurred
<ent 2,,000, paid as incurred
'nsurance 2,00 e*piration per month
#epreciation, including new fi*tures 2500 per month
The company wants a minimum of 2/0,000 as a cash alance at the end of each month! =e will
assume that CHC can orrow or repay loans in multiples of 2/,000! -anagement plans to
orrow no more cash than necessary and to repay as promptly as possile! Assume orrowing
occurs at the eginning and repayment at the end fo the months in (uestion! 'nterest is paid,
under the terms of this credit arrangement, when the related loan is repaid! The interest rate is
/79 per year!
E*hiit +),
The Cooking Hut Company
;alance Sheet -arch ./, ,001
Assets
Current Assets
Cash 2/0,000
Accounts receivale /8,000
-erchandise 'nventory 37,000
:ne*pired insurance /,700 2+5,700
>lant Assets
E(uipment, fi*tures 2.+,000
Accumulated depreciation /,,700 ,3,,00
Total assets 2/00,000
?iailities @ Awners$ E(uity
Current ?iailities
Accounts payale 2/8,700
Accrued wages and commission payale 3,,50 2,/,050
Awners$ e(uity +7,150
Total liailities and owners$ e(uity 2/00,000
<e(uired4 >repare the operating and financial udget which includes sales udget, purchases,
cost of goods sold, operating e*penses, cash udget, udgeted income statement and
udgeted alance sheet for the months in (uestion! ('ncome statement is prepared for the four
months ended &uly ./, ,001 while ;alance sheet is for &uly ./, ,001)!