Computer Superstores, Inc., has a strong belief in using highly decentralized management. You are the new manager of the company’s store in the Mall of America.

You know much about how to buy, how to display, how to sell, and how to reduce shoplifting. You know little about accounting and finance, however. Top management is convinced that training for higher management should include the active participation of store managers in the budgeting process.

You have been asked to prepare a complete master budget for your store for June, July, and August. You are responsible for its actual full preparation. All accounting is done centrally, so you have no expert help on the premises. In addition, tomorrow the branch manager and the assistant controller will be here to examine your work; at that time, they will assist you in formulating the final budget document. The idea is to have you prepare the budget a few times so that you gain more confidence about accounting matters.

You want to make a favorable impression on your superiors, so you gather the following data as of May 31, 20X5:



Recent and Projected Sales





Accounts receivable




Net furniture




Total assets




Accounts payable




Owners’ equity




Credit sales are 90% of total sales. Credit accounts are collected 80% in the month following the sale and 20% in the following month.

Assume that bad debts are negligible and can be ignored. The accounts receivable on May 31 are the results of the credit sales for April and May:

(.20 x .90 x $300,000) + (1.0 x .90 x $350,000) = $369,000.

The average gross profit on sales is 40%. ; cost of goods sold is 60% The policy is to acquire enough inventory each month to equal the following month’s projected cost of goods sold. All purchases are paid for in the month following purchase.

Salaries, wages, and commissions average 20% of sales; all other variable expenses are 4% of sales.

Fixed expenses for rent, property taxes, and miscellaneous payroll and 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 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 paid only at the time of repaying principal. The interest rate is 10% per annum; round interest computations to the nearest ten dollars. All loans and repayments of principal must be made in multiples of a thousand dollars.


1. Prepare a budgeted income statement for the coming quarter, a budgeted statement of monthly cash receipts and disbursements (for each of the next three months), and a budgeted balance sheet for August 31, 20X5. All operations are evaluated on a beforeincome- 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.