Question

Wheeling Company is a merchandiser that provided a balance sheet as of September 30 as shown below:

Wheeling Company Balance Sheet September 30
Assets
Cash	$	74,800
Accounts receivable		114,000
Inventory		48,600
Buildings and equipment, net of depreciation		309,000
Total assets	$	546,400
Liabilities and Stockholders’ Equity
Accounts payable	$	213,900
Common stock		216,000
Retained earnings		116,500
Total liabilities and stockholders’ equity	$	546,400

The company is in the process of preparing a budget for October and has assembled the following data:

1. Sales are budgeted at $360,000 for October and $370,000 for November. Of these sales, 35% will be for cash; the remainder will be credit sales. Forty percent of a month’s credit sales are collected in the month the sales are made, and the remaining 60% is collected in the following month. All of the September 30 accounts receivable will be collected in October.

2. The budgeted cost of goods sold is always 45% of sales and the ending merchandise inventory is always 30% of the following month’s cost of goods sold.

3. All merchandise purchases are on account. Thirty percent of all purchases are paid for in the month of purchase and 70% are paid for in the following month. All of the September 30 accounts payable to suppliers will be paid during October.

4. Selling and administrative expenses for October are budgeted at $80,600, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $3,090 for the month.

Required:

2. Assume the following changes to the underlying budgeting assumptions:

(1) 50% of a month’s credit sales are collected in the month the sales are made and the remaining 50% is collected in the following month, (2) the ending merchandise inventory is always 10% of the following month’s cost of goods sold, and (3) 20% of all purchases are paid for in the month of purchase and 80% are paid for in the following month. Using these new assumptions, calculate or prepare the following:

a. The budgeted cash collections for October.

b. The budgeted merchandise purchases for October.

c. The budgeted cash disbursements for merchandise purchases for October.

d. Net operating income for the month of October.

e. A budgeted balance sheet at October 31

Answer 1

	1.)	Schedule of expected cash collections for October
		Particulars	Amount in $
		Collection of accounts receivable at September 30	1,14,000
		Cash Sale of October ( 360,000 x 35%)	1,26,000
		Credit Sale collection of october ( 360,000 x 65% x 40% )	93,600
		Total cash collections	3,33,600
	2..)	Merchandise Purchases Budget for October
		Particulars	Amount in $
		Cost of goods sold (360,000 x 45% )	1,62,000
		Closing Inventory ( 370,000 x 45% x 30%)	49,950
		Total Needs	2,11,950
		Less: Opening Inventory	-48,600
		Purchase Budget	1,63,350
	3.)	Schedule of cash disbursements for Purchases for October
		Particulars	Amount in $
		Payment of accounts payable at September 30	2,13,900
		From October Purchases ( 163,350 x 30% )	49,005
		Total cash disbursements	2,62,905
	4.)	Income Statement
		For the month of October
		Sales	3,60,000
		Less: Cost of goods sold	-1,62,000
		( 360,000 x 45% )
		Gross profit	1,98,000
		Less: Monthly selling & administrative expenses	-80,600
		Less: Depreciation	-3,090
		Net Operating Income	1,14,310
	5.)	Balance Sheet
		October 31
		Assets	Amount in $	Working
		Cash	64,895	(74,800 +333,600 - 262,905 -80,600)
		Accounts Receivable	1,40,400	(114,000 +360,000 -333,600 )
		Inventory	49,950	(370,000 x 45% x 30% )
		Plant & Equipment, net of depreciation	3,05,910	(309000 - 3090 )
		Total Assets	5,61,155
		Liabilities & stockholder's equity
		Accounts Payable	1,14,345	(213900 +163,350 - 262,905 )
		Common Stock	2,16,000	Given
		Retained earnings	2,30,810	(116500 + 114,310)
		Total Liabilities & stockholder's equity	5,61,155