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HAMPTON FREEZE, INC. Sales Budget For the Year Ended December 31, 2003 Quarter 1 Budgeted sales in cases Selling price per case 10,000 \$ 20.00 2 30,000 \$ 20.00 3 40,000 \$ 20.00 4 20,000 \$ 20.00 -----------\$400,000 ====== Year 100,000 \$ 20.00 -----------2,000,000 ======

------------ ------------ -----------Total sales \$ 200,000 \$600,000 \$800,00 ====== ====== ======

Percentage of sales collected in the period of the sales Percentage of sales collected in the period after the sales 70% 30%

70% 30%

Schedule of Expected Cash Collections

1 Accounts receivable, beginning balance 2 First quarter sales 3 Second quarter sales 4 Third quarter sales 5 Fourth quarter sales

\$90,000 140,000 \$60,000 420,000 \$180,000 560,000 \$240,000 280,000 --------------------- --------------------\$520,000 ======

\$90,000 200,000 600,000 800,000 280,000 ----------\$1,970,000 ======

6 Total cash collections 1 Cash collections from last years fourth-quarter sales.

\$230,000 \$480,000 \$740,000 ====== ====== ======

2 \$200,000 70%; \$200,000 30% 3 \$600,000 70%; \$600,000 30% 4 \$800,000 70%; \$800,000 30% 5 \$400,000 70% 6 Uncollected fourth quarter sales appear as accounts receivable on the company's end of year balance sheet.

Explanation of sales budget for Hampton Freeze Inc.This example contains the sales budget for Hampton Freeze for the year 2009, by quarters. Notice from the example that the company plans to sell 100,000 cases of popsicles during the year, with sales peaking in the third quarter. After preparing sales budget, a schedule of expected cash collections is also prepared such as the one that appear in our example. Cash collections consists of sales made to customers in prior periods plus collections on sales made in the current budget period. In our example, 70% of sales are collected in the quarter in which the sales are made and the remaining 30% are collected in the following

quarter. For example, 70% of the first quarter sales of \$200,000 (or 140,000) is collected during the first quarter and 30% (or \$60,000) is collected during the second quarter.Hampton Freeze, Inc. Production Budget For the Year Ended December 31, 2009 Quarter 1 Budgeted sales (see sales budget) Add desired ending inventory of finished goods* 10,000 6,000 -----------Total needs Less Beginning inventory of finished goods** 16,000 2,000 -----------Required production 14,000 ====== 2 30,000 8,000 -----------38,000 6,000 -----------32,000 ====== 3 40,000 4,000 -----------44,000 8,000 -----------36,000 ====== 4 20,000 3,000 ----------23,000 4,000 -----------19,000 ====== Year 100,000 3,000 ----------103,000 2,000 -----------101,000 ======

*Twenty percent of the next quarters sales. The ending inventory of 3,000 cases is assumed **The beginning inventory in each quarter is the same as the prior quarter's ending inventory

Explanation of Production Budget of Hampton Freeze Inc.At Hampton Freeze, management believes that an ending inventory equal to 20% of the next quarter's sales strikes the appropriate balance. Example contains the production budget for Hampton Freeze. The first row in the production budget contains the budgeted sales, which have been taken directly from the sales budget (see sales budget page). The total needs for the first quarter are determined by adding together the budgeted sales of 10,000 cases for the quarter and the desired ending inventory of 6,000 cases. The ending inventory is intended to provide some cushion in case problems develop in production or sales increase unexpectedly. Since the budgeted sales for the second quarter are 30,000 cases and management would like the ending inventory in each quarter to 20% of the following quarter's sales, the desired ending inventory is 6,000 cases (20% of 30,000 cases). Consequently, the total needs for the first quarter are 16,000 cases. However, since the company already has 2,000 cases in beginning inventory, only 14,000 cases need to be produced in first quarter. Pay particular attention to the year column to the right of the production budget in the example. In some cases (e.g., budgeted sales, total needs, and required production), the amount listed for the year is the sum of the quarterly amounts for the item. In other cases (e.g., desired inventory of finished goods and beginning inventory of finished goods), the amount listed for the year is not simply the sum of the quarterly amounts. From the standpoint of the entire year, the beginning inventory of finished goods is the same as the beginning inventory of finished goods for the first quarter--it is not the sum of the beginning inventories of the finished goods for all quarters. Similarly, from the standpoint of the entire year, the ending

inventory of finished goods is the same as the ending inventory of finished goods for the fourth quarter--it is not the sum of the ending inventories of finished goods for all four quarters.Hampton Freeze Inc. Cash Budget For the Year Ended December 31, 2009 Quarter Other budget ref. Cash balance, beginning Add receipts: Collections from customers See sales budget 230,000 -----------Total cash available 272,500 -----------Less disbursements: Direct materials Direct labor Manufacturing overhead Selling and Administrative Equipment purchases Dividends material budget Labor budget Overhead budget sell. & adm. budget 49,500 84,000 68,000 93,000 50,000 8,000 -----------Total disbursements 352,500 -----------Excess/deficiency of cash available over disbursements (80,000) 72,300 192,000 96,800 130,900 40,000 8,000 100,050 216,000 103,200 184,750 20,000 8,000 79,350 114,000 76,000 129,150 20,000 8,000 301,200 606,000 344,000 537,800 130,000 32,000 480,000 740,000 520,000 1,970,000 1 \$42,500 2 \$40,000 3 \$40,000 4 40,500 Year 42,500

------------ ------------ ------------ -----------520,000 780,000 560,500 2,012,500

------------ ------------ ------------ ------------

------------ ------------ ------------ -----------540,000 632,000 426,500 1,951,000

------------ ------------ ------------ -----------(20,000) 148,000 134,000 61,500

Financing: Borrowings (at beginning)* Payments (at beginning) Interest** 120,000 -----------Total financing 1200,000 -----------Cash balance, ending \$40,000 ====== 60,000 180,000

(100,000) (80,000) (180,000) (7,500) (65,00) (14,000)

------------ ------------ ------------ -----------(60,000) (107,500) (86,500) (14,000)

------------ ------------ ------------ -----------\$40,000 ====== \$40,500 ====== \$47,500 ====== \$47,500 ======

*The company requires a minimum cash balance of \$40,000. Therefore, borrowing must be sufficient to cover the cash deficiencies of \$80,000 in quarter 1 and to provide for the minimum cash balance of \$40,000. All borrowings and repayments of principal are in round \$1,000 amount. **The interest payment relate only to the the principle being repaid at the time it is

repaid. For example, the interest in quarter 3 relates only to the interest due on the \$100,000 principle being repaid from quarter 1 borrowing: \$100,000 10% per year 3/4 year = \$7,500 The interest paid in quarter 4 is computed as follows: \$20,000 10% per year 1 year \$60,000 10% per year 3/4 year Total interest paid \$2,000 4,500 --------\$6,500 ======

Explanation of cash budget for Hampton Freeze Inc.Cash budget builds on the other budgets ( sales budget, material budget, Labor budget, Overhead budget, sell. & adm. budget) and on some additional data that are provided below: The beginning cash balance is \$42,500 Management plans to spend \$130,000 during the year on equipment purchases: \$50,000 in the first quarter; \$40,000 in the second quarter; \$20,000 in the third quarter; \$20,000 in the fourth quarter. The board of directors has approved cash dividends of \$8,000 per quarter. Management would like to have a cash balance of at least \$40,000 at the beginning of each quarter for contingencies. Assume Hampton Freeze will be able to get agreement from a bank for an open line of credit. This would enable the company to borrow at an interest rate of 10% per year. All borrowings and repayments would be in round \$1,000 amount. All borrowings would occur at the beginning of the quarters and all repayments are made and only on the amount of principal that is repaid.

The cash budget is prepared one quarter at a time, starting with the first quarter. Management began the cash budget by entering the beginning balance of cash for the first quarter of \$42,500--a number that is given above. Receipts--in this case, just the \$230,000 in cash collection from customers--are added to the beginning balance to arrive at the total cash available of \$272,500. Since the total disbursements are \$352,500 and the total cash available is only \$272,500, there is short fall of \$80,000. Since management would like to have a beginning cash balance of at lease \$40,000 for the second quarter, the company would need to borrow \$120,000. Required borrowing at the end of the first quarter Desired ending cash balance Plus deficiency of cash available over disbursements

\$40,000 80,000 ----------

Required borrowings

\$120,000 ======

The second quarter of cash budget is handled similarly. Note that the ending cash balance of the first quarter is brought forward as the beginning cash balance for the second quarter. Also note that additional borrowing is required in the second quarter because of the continued cash shortfall. Required borrowing at the end of the second quarter Desired ending cash balance Plus deficiency of cash available over disbursements Required borrowings

\$40,000 20,000 -----------\$60,000 ======

In third quarter, the cash flow situation improves dramatically and the excess of cash available over disbursement is \$148,000. This makes it possible for the