Question

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

Wheeling Company Balance Sheet September 30
Assets
Cash	$	78,600
Accounts receivable		102,000
Inventory		40,500
Buildings and equipment, net of depreciation		279,000
Total assets	$	500,100
Liabilities and Stockholders’ Equity
Accounts payable	$	129,600
Common stock		216,000
Retained earnings		154,500
Total liabilities and stockholders’ equity	$	500,100

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

Sales are budgeted at $300,000 for October and $310,000 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.

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.

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.

Selling and administrative expenses for October are budgeted at $86,800, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,790 for the month.

Required:

1. Using the information provided, calculate or prepare the following:

a. The budgeted cash collections for October.

b. The budgeted merchandise purchases for October.

c. The budgeted cash disbursements for merchandise purchases for October.

d. The budgeted net operating income for October.

e. A budgeted balance sheet at October 31.

2. Assume the following changes to the underlying budgeting assumptions:

(1) 50% of a month’s credit sales are collected in the month the sales are made and the remaining 50% is collected in the following month, (2) the ending merchandise inventory is always 10% of the following month’s cost of goods sold, and (3) 20% of all purchases are paid for in the month of purchase and 80% are paid for in the following month. Using these new assumptions, calculate or prepare the following:

a. The budgeted cash collections for October.

b. The budgeted merchandise purchases for October.

c. The budgeted cash disbursements for merchandise purchases for October.

d. Net operating income for the month of October.

e. A budgeted balance sheet at October 31.

Answer 1

SOLUTION

1.

(A) Schedule of expected cash collections for October-

	October ($)
Accounts receivable	102,000
October Sales-
Cash sales (300,000*35%)	105,000
Credit sales (300,000*65%*40%)	78,000
Total cash collections	285,000

(B) Merchandise purchase budget-

	October ($)
Budgeted cost of goods sold (300,000*45%)	135,000
Add: Ending inventory (310,000*45%*30%)	41,850
Total needs	176,850
Less: Beginning inventory	(40,500)
Required purchases	136,350

(C) Schedule of expected cash disbursement-

	October ($)
Accounts payable	129,600
October purchases ($136,350*30%)	40,905
Total cash disbursements	170,505

(D) Income statement-

	Amount ($)
Sales	300,000
Cost of goods sold	135,000
Gross margin	165,000
Selling and administrative expenses	86,800
Depreciation	2,790
Net Income	75,410

(E) Budegeted balance sheet-

	Amount ($)
Assets
Cash	106,295
Accounts receivable	117,000
Inventory	41,850
Building and Equipment, net of depreciation	276,210
Total assets	541,355
Liabilities and stock holder's equity
Accounts payable	95,445
Common stock	216,000
Retained earnings	229,910
Total Liabilities and stock holder's equity	541,335

Notes-

Cash- (78,600+285,000-170,505-86,800) = $106,295

Accounts receivable- (300,000*65%*60%) = $117,000

Accounts payable - ($136,350*70%) = $95,445

2.

(A) Schedule of expected cash collections for October-

	October ($)
Accounts receivable	102,000
October Sales-
Cash sales (300,000*35%)	105,000
Credit sales (300,000*65%*50%)	97,500
Total cash collections	304,500

(B) Merchandise purchase budget-

	October ($)
Budgeted cost of goods sold (300,000*45%)	135,000
Add: Ending inventory (310,000*45%*10%)	13,950
Total needs	148,950
Less: Beginning inventory	(40,500)
Required purchases	108,450

(C) Schedule of expected cash disbursement-

	October ($)
Accounts payable	129,600
October purchases ($108,450*20%)	21,690
Total cash disbursements	151,290

(D) Income statement-

	Amount ($)
Sales	300,000
Cost of goods sold	135,000
Gross margin	165,000
Selling and administrative expenses	86,800
Depreciation	2,790
Net Income	75,410

(E) Budegeted balance sheet-

	Amount ($)
Assets
Cash	145,010
Accounts receivable	97,500
Inventory	13,950
Building and Equipment, net of depreciation	276,210
Total assets	532,670
Liabilities and stock holder's equity
Accounts payable	86,760
Common stock	216,000
Retained earnings	229,910
Total Liabilities and stock holder's equity	532,670

Notes-

Cash- (78,600+304,500-151290-86,800) = $145,010

Accounts receivable- (300,000*65%*50%) = $97,500

Accounts payable - ($108,450*80%) = $86,760