Question

Question 4 Budgeting – To be done on Excel. Email your answer to tutor.

Hudson Holdings Ltd is a merchandising company that is preparing a master budget for the third quarter of the calendar year. The company’s balance sheet at June 30^th is shown below:

Hudson Holdings Ltd
Balance Sheet
June 30
ASSETS
Cash	$108,000
Accounts Receivable	$163,200
Inventory	$ 74,400
Plant & Equipment Net of Depreciation	$252,000
Total Assets	$597,600
LIABILITIES & STOCKHOLDERS’ EQUITY
Accounts Payable	$ 85,320
Shareholders’ Equity	$392,400
Retained Earnings	$119,880
Total Liabilities & Stockholders’ Equity	$597,600

Hudson Holdings Ltd managers have made the following additional assumptions and estimates:

• Estimated sales for July, August, September, and October will be $252,000, $276,000, $264,000, and $288,000, respectively.

• All sales are on credit and all credit sales debts are collected. Each month’s credit sales are collected 35% in the month of sale and 65% in the month following the sale. All of the accounts receivable at June 30 will be collected in July.

• Each month’s ending inventory must equal 30% of the cost of the next month’s sales. The cost of goods sold is 60% of sales. The company pays for 40% of its merchandise purchases in the month of the purchase and the remaining 60% in the month following the purchase. All of the accounts payable at June 30 will be paid in July.

• Monthly selling and administrative expenses are always $72,000. Each month $6,000 of this total amount is depreciation expense and the remaining $66,000 relates to expenses that are paid in the month they are incurred.

• The company does not plan to borrow money or pay or declare dividends during the quarter ended September 30. The company does not plan to issue any shares or repurchase its own shares during the quarter ended September 30.

REQUIRED

1. Prepare a schedule of expected cash collections for July, August, and September. Also calculate total cash collections for the quarter ended September 30.

(b)

i           Prepare a merchandise purchases budget for July, August and September and also calculate total merchandise purchases for the quarter ended September 30.                                                                                    

ii          Prepare a schedule of expected cash disbursements for merchandise purchases for July, August, and September. Also calculate total cash disbursements for merchandise purchases for the quarter ended September 30.                                                                                                           

(c) Prepare an income statement for the quarter ended September 30. (Use the absorption format)                                                                                              

(d) Prepare a balance sheet as at September 30.                                              

Question 4 To be done on Excel.

………………REFER TO THE DATA IN QUESTION 4 ABOVE………………………………..

Hudson Holdings Ltd is considering making the following changes to the assumptions underlying its master budget.

1. Each month’s credit sales are collected 45% in the month of sale and 55% in the month following the sale.

2. Each month’s ending inventory must equal 20% of the cost of next month’s sales.

3. The company pays for 30% of its merchandise purchases in the month of the purchase and the remaining 70% in the month following the purchase.

All other information from question 4 above that is not mentioned remains the same.

REQUIRED:

Using the new assumptions described above, complete the following requirements:

a.

Prepare a schedule of expected cash flows for July, August, and September. Also calculate total cash collections for the quarter ended September 30.                                 

b.

1. Prepare a merchandise purchases budget for July, August, and September. Also calculate total merchandise purchases for the quarter ended September 30.             

2. Prepare a schedule of expected cash disbursements for merchandise purchases for July, August and September. Also calculate total cash disbursements for the quarter ended September 30.

c.

Prepare an income statement for the quarter ended September 30. (Use the absorption format)

d.

Prepare a balance sheet as at September 30.                                              

Answer 1

a.

Cash Collection Budget
		July	August	September	Total
Accounts Receivable	$       163,200	$      163,200
Sales July	$       252,000	$         88,200 (35%)	$         163,800 (65%)
Sales August	$       276,000		$           96,600 (35%)	$       179,400 (65%)
Sales September	$       264,000			$         92,400 (35%)
		$      251,400	$         260,400	$       271,800	$     783,600

b.i.

Merchandise Purchase Budget
	July	August	September	Total
Sales	$ 252,000.00	$       276,000.00	$   264,000.00
Cost of Goods Sold @60%	$ 151,200.00	$       165,600.00	$   158,400.00
Add : Desired Ending Inventory	$   49,680.00	$         47,520.00	$     51,840.00
Cost of Goods Available	$ 200,880.00	$       213,120.00	$   210,240.00
Less : Beginning Inventory	$   74,400.00	$         49,680.00	$     47,520.00
Merchandise Purchase Cost	$ 126,480.00	$       163,440.00	$   162,720.00	$       452,640

Desired ending inventory is 30% of cost of sales of next month i.e. For July 30% of $165600, August 30% of $158400 and September 30% of 60% of $288000

b.ii.

Cash Payment Budget
		July	August	September	Total
Accounts Receivable	$         85,320	$               85,320
Sales July	$       126,480	$               50,592 (40%)	$           75,888 (60%)
Sales August	$       163,440		$           65,376 (40%)	$         98,064 (60%)
Sales September	$       162,720			$         65,088 (40%)
		$             135,912	$         141,264	$       163,152	$     440,328

c.

Statement of Income
Net Sales Revenue	$       792,000	=252000+276000+264000
Cost of Goods Sold	$       475,200	=792000*60%
Gross Profit	$       316,800
Operating Expenses
Administrative Expenses	$       198,000	=66000*3
Depreciation	$         18,000	=6000*3
Operating Income	$       100,800

d.

Hudson Holdings Ltd
Balance Sheet
Sep-30
ASSETS
Cash	$       253,272	=108000+783600-440328-198000
Accounts Receivable	$       171,600	=264000*65%
Inventory	$         51,840
Plant & Equipment Net of Depreciation	$       234,000	=252000-18000
Total Assets	$       710,712
LIABILITIES & STOCKHOLDERS’ EQUITY
Accounts Payable	$         97,632	=162720*60%
Shareholders’ Equity	$       392,400
Retained Earnings	$       220,680	=119880+100800
Total Liabilities & Stockholders’ Equity	$       710,712

Cash Balance = Beginning Balance + Total Cash Receipts - Total Cash payments for purchases - Cash payments for Administrative expenses

New Assumptions

Cash Collection Budget
		July	August	September	Total
Accounts Receivable	$       163,200	$             163,200
Sales July	$       252,000	$             113,400 (45%)	$         138,600 (55%)
Sales August	$       276,000		$         124,200 (45%)	$       151,800 (55%)
Sales September	$       264,000			$       118,800 (45%)
		$             276,600	$         262,800	$       270,600	$     810,000

Merchandise Purchase Budget
	July	August	September	Total
Sales	$ 252,000.00	$       276,000.00	$   264,000.00
Cost of Goods Sold @60%	$ 151,200.00	$       165,600.00	$   158,400.00
Add : Desired Ending Inventory	$   33,120.00	$         31,680.00	$     34,560.00
Cost of Goods Available	$ 184,320.00	$       197,280.00	$   192,960.00
Less : Beginning Inventory	$   74,400.00	$         33,120.00	$     31,680.00
Merchandise Purchase Cost	$ 109,920.00	$       164,160.00	$   161,280.00	$       435,360

Desired ending inventory is 20% of cost of sales of next month i.e. For July 20% of $165600, August 20% of $158400 and September 20% of 60% of $288000

Cash Payment Budget
		July	August	September	Total
Accounts Receivable	$         85,320	$               85,320
Sales July	$       109,920	$               32,976 (30%)	$           76,944 (70%)
Sales August	$       164,160		$           49,248 (30%)	$       114,912 (70%)
Sales September	$       161,280			$         48,384 (30%)
		$             118,296	$         126,192	$       163,296	$     407,784

Statement of Income
Net Sales Revenue	$       792,000	=252000+276000+264000
Cost of Goods Sold	$       475,200	=792000*60%
Gross Profit	$       316,800
Operating Expenses
Administrative Expenses	$       198,000	=66000*3
Depreciation	$         18,000	=6000*3
Operating Income	$       100,800

Hudson Holdings Ltd
Balance Sheet
Sep-30
ASSETS
Cash	$       312,216	=108000+810000-407784-198000
Accounts Receivable	$       145,200	=264000*55%
Inventory	$         34,560
Plant & Equipment Net of Depreciation	$       234,000	=252000-18000
Total Assets	$       725,976
LIABILITIES & STOCKHOLDERS’ EQUITY
Accounts Payable	$       112,896	=161280*70%
Shareholders’ Equity	$       392,400
Retained Earnings	$       220,680	=119880+100800
Total Liabilities & Stockholders’ Equity	$       725,976