Question

Jackson, Inc.(JI) is a merchandiser that is preparing a master budget for the month of July. The company’s balance sheet as of June 30th is shown below:

Jackson, Inc.
Balance Sheet
June 30
Assets
Cash	$	120,000
Accounts receivable		166,000
Inventory		37,200
Plant and equipment, net of depreciation		554,800
Total assets	$	878,000
Liabilities and Stockholders’ Equity
Accounts payable	$	93,000
Common stock		586,000
Retained earnings		199,000
Total liabilities and stockholders’ equity	$	878,000

JI’s managers have made the following additional assumptions and estimates:

Estimated sales for July and August are $310,000 and $330,000, respectively.

Each month’s sales are 20% cash sales and 80% credit sales. Each month’s credit sales are collected 30% in the month of sale and 70% 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 20% of the cost of 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 $70,000. Each month $10,000 of this total amount is depreciation expense and the remaining $60,000 relates to expenses that are paid in the month they are incurred.

The company does not plan to buy or sell any plant and equipment during July. It will not borrow any money, pay a dividend, issue any common stock, or repurchase any of its own common stock during July.

Required:

1. Calculate the expected cash collections for July.

2. Calculate the expected cash disbursements for merchandise purchases for July.

3. Prepare a cash budget for July.

4. Prepare a budgeted income statement for the month ended July 31^st. Use an absorption format.

5. Prepare a budgeted balance sheet as of July 31^st.

6. Calculate the estimated accounts receivable turnover and inventory turnover for the month of July.

7. Calculate the estimated operating cycle for the month of July. (Hint: Use 30 days in the numerator to calculate the average collection period and the average sales period.)

8. Using the indirect method, calculate the estimated net cash provided by operating activities for July.

Answer 1

1. Expected cash collections for July :

Cash Sales of July	$ 62,000
Credit Sales of July	74,400
Accounts Receivable : June	166,000
Total Cash Collections	$ 302,400

2. Expected cash disbursements for merchandise purchases for July :

Acccounts Payable: June 30	$ 93,000
Cash disbursements for July purchases ($ 188,400 x 40% )	75,360
Budgeted Cash disbursements for Merchandise Purchases	$ 168,360

Expected Mrchandise Purchases:

Cost of Sales : July	$ 186,000
Desired Ending Inventory ( $ 330,000 x 60 % x 20% )	39,600
Total Inventory Needs	$ 225,600
Less: Beginning Inventory	(37,200)
Budgeted Purchases for July	$ 188,400

3. Jackson Inc.

Cash Budget

For the month ending July 31

Beginning cash balance		$ 120,000
Add: Cash receipts		302,400
Total cash available		422,400
Less Cash disbursements for
Merchandise purchases	$ 168,360
Selling and Administrative Expenses	60,000
Total Cash Disbursements		228,360
Ending cash balance		$ 194,040

4. Jackson Inc.

Budgeted Income Statement

For the month ended July 31

Sales		$ 310,000
Cost of Goods Sold
Beginning Inventory	37,200
Add :Budgeted Purchases	188,400
Less: Desired ending inventory	(39,600)	186,000
Gross Profit		124,000
Selling and Administrative Expenses		70,000
Net Operating Income		54,000

5. Jackson Inc.

Balance Sheet

July 31

Assets	$
Cash	194,040
Accounts Receivable	173,600
Inventory	39,600
Plant and Equipment, net of depreciation	544,800
Total Assets	$ 952,040
Liabilities and Stockholders' Equity
Accounts Payable	$ 113,040
Common Stock	586,000
Retained Earnings	253,000
Total Liabilities and Stockholders' Equity	$ 952,040

6. Estimated Accounts Receivable Turnover = Sales / Average Accounts Receivable = $ 310,000 / $ 169,800 = 1.83 times.

Estimated Inventory Turnover = Cost of Sales / Average Inventory = $ 186,000 / $ 38,400 = 4.84 times.

7 Estimated Operating Cycle = 30 / 1.83 + 30 / 4.84 = 16.39 days + 6.20 days = 22.59 days.