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Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows:

Endless Mountain Company
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash $ 46,200
Accounts receivable (net) 260,000
Raw materials inventory (4,500 yards) 11,250
Finished goods inventory (1,500 units) 32,250
Total current assets $ 349,700
Plant and equipment:
Buildings and equipment 900,000
Accumulated depreciation (292,000 )
Plant and equipment, net 608,000
Total assets $ 957,700
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 158,000
Stockholders’ equity:
Common stock $ 419,800
Retained earnings 379,900
Total stockholders’ equity 799,700
Total liabilities and stockholders’ equity $ 957,700

The company’s chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units.

All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

Each quarter’s ending finished goods inventory should equal 15% of the next quarter’s unit sales.

Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter’s ending raw materials inventory should equal 10% of the next quarter’s production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 yards.

Seventy percent of each quarter’s purchases are paid for in the quarter of purchase. The remaining 30% of each quarter’s purchases are paid in the following quarter.

Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred.

The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company’s lender imposes a simple interest rate of 3% per quarter on any borrowings.

Dividends of $15,000 will be declared and paid in each quarter.

The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the “first-out” to production and the most recently completed finished goods are the “first-out” to customers.

Required:

1. Using the indirect method, calculate Endless Mountain Company’s estimated net cash provided by operating activities for 2017.

2. Prepare the company’s budgeted statement of cash flows for the year ended December 31, 2017.

Expert Answer

 

GIVEN DATA:-

Endless Mountain Company Balance Sheet December 31, 2016 Dtails are given in the above table and other information also given.

REUIRED:-

1. Using the indirect method, calculate Endless Mountain Company’s estimated net cash provided by operating activities for 2017.

2. Prepare the company’s budgeted statement of cash flows for the year ended December 31, 2017.

SOLUTION:-

1. Endless Mountain Company’s estimated net cash provided by operating activities for 2017 Using indirect method:

a) SALES BUDGET: PARTICULARS 03 1200037000 1500025000 89000 32 384000 1184000 480000 800000 2848000 Q1 Q2 TOTAL Budgeted unit sales Budgeted selling price Budgeted sales 32 32 32 32 SCHEDULE OF COLLECTIONS: PARTICULARS Q1 260000 288000 96000 Q2 03 TOTAL 260000 384000 1184000 Dec-2016 receivables Q1 Sales Q2 Sales Q3 Sales Q4 Sales Total cash collections 888000 296000 360000 120000 480000 600000 600000 548000 984000 656000 720000 2908000 Accounts Receivable 96000 296000 120000 200000 200000 b) PRODUCTION BUDGET: PARTICULARS 03 1200037000 1500025000 89000 Q1 Q2 TOTAL Budgeted unit sales ADD: Desired ending invento Total units needed LESS Beginning invento Budegeted production units 5550 2250 3750 1950 1950 1755039250 1875026950 90950 2250 1605033700 1650023200 89450 1500 5550 3750 1500

2.  Company’s Budgeted Statement of cash flows for the year ended December 31, 2017:

BUDGETED INCOME STATEMENT:

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