Question

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

VeeLance Company Balance Sheet September 30
Assets
Cash	$	69,400
Accounts receivable		166,000
Inventory		83,700
Buildings and equipment, net of depreciation		257,000
Total assets	$	576,100
Liabilities and Stockholders’ Equity
Accounts payable	$	246,600
Common stock		216,000
Retained earnings		113,500
Total liabilities and stockholders’ equity	$	576,100

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

1. Sales are budgeted at $620,000 for October and $630,000 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 $83,800, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,570 for the month.

Questions:

• Using the information provided, calculate or prepare a statement for each of the following:

a. Budgeted cash collections for October.

b. Budgeted merchandise purchases for October.

c. Budgeted cash disbursements for merchandise purchases for October.

d. Budgeted net operating income for October.

e. Budgeted balance sheet at October 31.

Answer 1

Requirement a:

VeeLance Company
Cash Collection Budget for October
Cash sales	$ 217,000
Cash Collection:
Accounts receivable	$ 166,000
Collection from credit sales	$ 161,200
Total cash collection	$ 544,200

Working Note:

Total sales of October = $620,000

Cash sales = Total sales × 35% = $620,000 × 35% = $217,000

Credit sales = Total sales × 65% = $620,000 × 35% = $403,000

Cash collected from credit sales in October = Total credit sales × 40% = $403,000 × 40% = $161,200

Requirement b:

VeeLance Company
Merchandise Purchase Budget for October
Budgeted cost of goods sold	$ 279,000
Add: Desired ending inventory	$ 85,050
Total requirement	$ 364,050
Less: Beginning inventory	$ 83,700
Merchandise needed to be purchased	$ 280,350

Working Note:

Cost of gods sold = 45% of sales

Cost of goods sold of October = $620,000 × 45% = $279,000

Cost of goods sold of November = $630,000 × 45% = $283,500

Ending inventory = 30% of next month’s cost of goods sold

Ending inventory of October = $283,500 × 30% = $85,050

Requirement c:

VeeLance Company
Budgeted Cash Disbursements for Merchandise Purchase for October
Total purchase (all on account)	$ 280,350
Cash paid:
Accounts payable	$ 246,600
Paid for credit sales	$ 84,105
Total cash disbursements	$ 330,705

Working Note:

Cash paid for credit purchase in October = Total credit purchase × 30%

= $280,350 × 30% = $84,105

Requirement d:

VeeLance Company
Budgeted Net Operating Income Statement
For the Month of October
Net Sales	$ 620,000
Less: Cost of goods sold	$ 279,000
Gross margin	$ 341,000
Less: Operating expenses:
Selling and administrative expenses	$ 83,800
Depreciation expenses	$ 2,570
Net operating income	$ 254,630

Requirement e:

VeeLance Company
Budgeted Balance Sheet
As on October 30
Assets:
Cash	$ 199,095
Accounts receivable	$ 241,800
Inventory	$ 85,050
Buildings and equipment, net of depreciation	$ 254,430
Total assets	$ 780,375
Liabilities and Stockholder's Equity
Accounts payable	$ 196,245
Common stock	$ 216,000
Retained earnings	$ 368,130
Total liabilities and stockholder's equity	$ 780,375

Working notes: Calculation of Account Balances at the end of October:

Cash:

Cash Budget for the Month of October
Beginning cash balance	$ 69,400
Add: Receipts	$ 544,200
Total cash available	$ 613,600
Less: Cash Disbursement:
For purchase of merchandise	$ 330,705
For selling and administrative expenses	$ 83,800
Total cash disbursement	$ 414,505
Ending cash balance	$ 199,095

Accounts receivable:

Accounts receivable = Credit sales – Cash collected = $403,000 - $161,200 = $241,800

Inventory:

Ending inventory of October = November’s cost of goods sold × 30% = $283,500 × 30% = $85,050

Buildings and equipment, net of depreciation:

Ending balance = Beginning balance – Depreciation expenses for the month of October

= $257,000 - $2,570 = $254,430

Accounts payable:

Accounts payable = Credit purchase – Cash paid = $280,350 - $84,105 = $196,245

Common stock:

No change in common stock.

Retained earnings:

Ending balance = Beginning balance + Net operating income

= $113,500 + $254,630 = $368,130