Question

Data regarding VeeLanceCorporation store's operations follow:

•Sales are budgeted at $340,000 for November, $360,000 for December, and $350,000 for January.

•Collections are expected to be 75% in the month of sale and 25% in the month following the sale.

•The cost of goods sold is 71% of sales.

•The the company desires an ending merchandise inventory equal to 75% of the cost of goods sold in the following month.

•Payment for merchandise is made in the month following the purchase.

•Other monthly expenses to be paid in cash are $21,400.

•Monthly depreciation is $21,200.

•Ignore taxes.

Balance SheetOctober 31

AssetsCash$22,200

Accounts receivable83,200

Merchandise inventory181,050

Property, plant and equipment (net of $596,000 accumulated depreciation)1,006,000

Total assets$1,292,450

Liabilities and Stockholders' EquityAccounts payable$196,200

Common stock640,000

Retained earnings456,250

Total liabilities and stockholders' equity$1,292,450.

Required:

a. Prepare a Schedule of Expected Cash Collections for November.

b. Prepare a Merchandise Purchases Budget for November.

c. Prepare Cash Budgets for November.

d. Prepare Budgeted Income Statement for November.

e. Prepare a Budgeted Balance Sheet for the end of November.

f.Explain, in your own words, the purpose of a budget. Does it guarantee performance? does it ensure that a company will be profitable?

g. Assume that the company desires a gross profit margin (ratio) of 25%. If the budget is met, will the company meet the desired goal? Explain.

Answer 1

a)	Schedule of expected cash collections
	Particulars			Amount
	Collection for the month of:
	October			$    83,200.00
	November	($ 340000 x 75%)		$ 2,55,000.00
				$ 3,38,200.00

b)	Merchandise Purchases Budget
	Particulars			November	December	January
	Sales			$ 3,40,000.00	$ 3,60,000.00	$ 3,50,000.00
	Cost of Goods sold (71%)			$ 2,41,400.00	$ 2,55,600.00	$ 2,48,500.00
Add:	Desired ending inventory (75%)			$ 1,91,700.00	$ 1,86,375.00
Less:	Beginning inventory			$ 1,81,050.00
	Purchase required			$ 2,52,050.00

c)	Cash Budget
	Particulars			Amount
	Beginning cash balance			$    22,200.00
Add:	Cash receipts			$ 3,38,200.00
	Total cash available			$ 3,60,400.00
Less:	Disbursements:
	Payment for merchandise			$ 1,96,200.00
	Other monthly expenses			$    21,400.00
	Total disbursements			$ 2,17,600.00
	Ending cash balance			$ 1,42,800.00

d)	Budgeted Income Statement
	Sales			$ 3,40,000.00
Less:	Cost of Goods sold			$ 2,41,400.00
	Gross Margin			$    98,600.00
Less:	Operating Expenses:
	Depreciation		$ 21,200.00
	Other expenses		$ 21,400.00	$    42,600.00
				$    56,000.00

e)	Budgeted Balance Sheet
	Assets
	Cash			$   1,42,800.00
	Accounts Receivable			$      85,000.00
	Merchandise Inventory			$   1,91,700.00
	Property, plant and equipment			$   9,84,800.00
	Total Assets			$ 14,04,300.00
	Liabilities
	Accounts Payable			$   2,52,050.00
	Stockholder's Equity
	Common Stock			$   6,40,000.00
	Retained Earnings			$   5,12,250.00
	Total Liabilities and Equity			$ 14,04,300.00

f)

The budget gives an advance intimation to the executives at different levels of management of the objectives to be attained and policies to be pursued (followed).

Budget gives a yardstick for comparing the actual results, finding out deviations and its reasons and taking corrective actions.

As the budget gives the guidelines and directions for the activities to be carried at various levels, it facilitates the delegation of authority to such levels and ultimately helps the centralized control.

It does not guarantee performance or profitability.

g)

As the cost of goods sold is 71% of sales, gross margin would be 29%. So if the budget is met, the company will meet the desired goal.