The World Restaurant is situated in a local shopping center and serves food of many different cultures

| January 30, 2017

The World Restaurant is situated in a local shopping center and serves food of many different cultures. It also caters private functions for companies. The results of operations for the fourth quarter of 2014 are as follows:

Sales ……………………………….……………………. $500,000

Less cost of sales ………………….…………………….. 345,000

Gross margin ……………………………………………. 155,000

Less selling, general, and administrative expenses ……… 60,000

Income before taxes ………………….…………………. 95,000

Less income taxes ………………….……………………. 38,000

Net income ………………….…………………………… $ 57,000

Additional information:

1. Sales and cost of sales are expected to increase by 13 percent in each of the next two quarters.

2. Eighty percent of sales are collected in the quarter of sale and 20 percent are collected in the quarter following sale.

3. The balance in accounts receivable at the end of 2014 relates to sales in the fourth quarter of 2014..

4. Food purchases in the fourth quarter of 2014 are $346,975.

5. The balance in accounts payable at the end of 2014 relates to purchases in the fourth quarter of 2014.

6. Food inventory at the end of 2014 is $17,000.For 2015, the company plans to hold ending inventory equal to 30 percent of the subsequent quarter’s cost of sales.

7. Selling, general, and administrative expenses are expected to increase by $12,000 due to increases in advertising and salaries. All other expenses in this category are expected to remain constant.

8. Seventy-five percent of inventory purchases are paid in the quarter of purchase and 25 percent are paid in the following quarter. All other expenses, including taxes, are paid in the quarter incurred.

9. Selling and administrative expense includes $5,000 of depreciation related to fixtures and equipment with a book value (net of accumulated depreciation) of $60,000 at the end of 2014..

10. The tax rate is expected to remain at 40 percent.

11. The cash balance at the end of 2014 is $40,000.

12. Common stock at the end of 2014 is $25,000 and retained earnings is $105,256.

13. Asset accounts are cash, accounts receivable, inventory, and furniture and fixtures. The only liability account is accounts payable. Owner’s equity accounts are common stock and retained earnings.

Required

a. Prepare a budgeted income statement for the first quarter of 2015.

b. Prepare a cash budget for the first quarter of 2015.

c. Prepare a budgeted balance sheet as of the end of the first quarter of 2015.

d. The company is discussing the possibility of expanding its restaurant to include a Thai section late in the first quarter of 2015. The section’s construction would require cash payments of $50,000.Assuming the company wants a minimum cash balance of $15,000 at the end of the first quarter, can a new section be added without obtaining additional funds?

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