Question

Mast Corporation seeks your assistance in developing cash and other budget information for May, June, and July. At April 30, the company had cash of $11,000, accounts receivable of $858,000, inventories of $143,880, and accounts payable of $39,029. The budget is to be based on the following assumptions.

.Each month’s sales are billed on the last day of the month.

.Customers are allowed a 2 percent discount if payment is made within 10 days after the billing date. Receivables are recorded in the accounts at their gross amounts (not net of discounts).

.The billings are collected as follows: 65 percent within the discount period, 20 percent by the end of the month, and 12 percent by the end of the following month. Three percent is uncollectible.

Purchase data are as follows.

.Of all purchases of merchandise and selling, general, and administrative expenses, 58 percent is paid in the month purchased and the remainder in the following month.

.The number of units in each month’s ending inventory equals 120 percent of the next month’s units of sales.

.The cost of each unit of inventory is $11.

.Selling, general, and administrative expenses, of which $3,000 is depreciation, equal 15 percent of the current month’s sales.

.Actual and projected sales follow:

	Dollars		Units
March	$	204,800	12,800
April		177,600	11,100
May		174,400	10,900
June		214,400	13,400
July		192,000	12,000
August		15,200	12,200

a. Compute the budgeted purchases in dollars for May.

b. Compute the budgeted purchases in dollars for June.

c. Compute the budgeted cash collections during May. (Do not round intermediate calculations.)

d. Compute the budgeted cash disbursements during June. (Do not round intermediate calculations.)

Answer 1

a) Computation of budgeted purchases (in $s) for May:

Let number of units purchased be x.

Given that, the number of units in each month’s ending inventory equals 120 percent of the next month’s units of sales.

We have,

Ending Inventory = Beginning Inventory + Purchases - Sales

1.20(13,400) = 1.20(10,900) + x - 10,900

16,080 = 13,080 + x - 10,900

16,080 = 2,180 + x

16,080 - 2,180 = x

x = 13,900

Purchases = Number of units purchased (x) * Cost of each unit of inventory

Purchases = 13,900 units * $11 = $152,900

Budgeted Purchases for May = $152,900

b) Computation of budgeted purchases (in $s) for June:

Let number of units purchased be x.

Given that, the number of units in each month’s ending inventory equals 120 percent of the next month’s units of sales.

We have,

Ending Inventory = Beginning Inventory + Purchases - Sales

1.20(12,000) = 1.20(13,400) + x - 13,400

14,400 = 16,080 + x - 13,400

14,400 = 2,680 + x

14,400 - 2,680 = x

x = 11,720

Purchases = Number of units purchased (x) * Cost of each unit of inventory

Purchases = 11,720 units * $11 = $128,920

Budgeted Purchases for June = $128,920

c) Computation of budgeted cash collections during May:

It is given that, 65% of the billings are collected within the discount period (2% discount is given), 20% by the end of the month, and 12% by the end of the following month. 3% is uncollectible.

Cash Collections during May = Collection of bills from April + Collection of bills from March

From April = ($177,600 * 65% * 0.98) + ($177,600 * 20%) = $113,131.20 + $35,520 = $148,651.20

From March = ($204,800 * 12%) = $24,576

Total Cash Collection = $148,651.20 + $24,576 = $173,227.20

Budgeted cash collections during May = $173,227.20

d) Computation of budgeted cash disbursements during June:

It is given that, 58% of purchases and other expenses is paid in the month purchased and the remainder in the following month i.e., for cash disbursements during June, 58% of purchases and other expenses for June will be paid in June itself and also 42% of purchases and other expenses for May will be paid in June.

Cash disbursement for Merchadise purchases = (58% * $128,920) + (42% * $152,900)

= $74,773.60 + $64,218

= $138,991.60

Cash disbursement for other expenses = (58% * $29,160) + (42% * $23,160) [Working Note]

= $16,912.80 + $9,727.20

= $26,640

Total cash disbursement = $138,991.60 + $26,640 = $165,631.60

Budgeted cash disbursements during June = $165,631.60

Working Note:

Given that, Selling, general, and administrative expenses including $3,000 depreciation = 15 percent of the current month’s sales

i) Selling, general, and administrative expenses for June = (15% * $214,400) - $3,000) = $29,160

ii) Selling, general, and administrative expenses for May = (15% * $174,400) - $3,000) = $23,160