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	$	71,600
Accounts receivable		122,000
Inventory		54,000
Buildings and equipment, net of depreciation		279,000
Total assets	$	526,600
Liabilities and Stockholders’ Equity
Accounts payable	$	155,600
Common stock		216,000
Retained earnings		155,000
Total liabilities and stockholders’ equity	$	526,600

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

Sales are budgeted at $400,000 for October and $410,000 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 $86,000, 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

1
a.	The budgeted cash collections for October:
	Budgeted sales=$400000.
	Cash sales=400000*35%=140000 (a)
	Credit sales=400000*65%=260000
	40% of credit sales collected in october=260000*40%=$ 104000 (b)
	Accounts receivable collected in october=$122000 (c)
	Budgeted cash collection=(a)+(b)+©=140000+104000+122000=$ 366000
b.	The budgeted merchandise purchases for October:
	Cost of goods sold=Beginning inventory+Purchase-Ending inventory
	Rearrange this formula to get budgeted merchandise purchase
	Purchase=Ending inventory+cost of goods sold-beginning inventory
	Ending inventory=30% of following months cost of goods sold
	Following months cost of goods sold=Following months sales*45%=410000*45%=$ 184500
	Ending inventory=184500*30%=$ 55350
	Cost of goods sold for october=400000*45%=$ 180000
	Beginning inventory=$ 54000
	Purchase=55350+180000-54000=$ 181350
c.	The budgeted cash disbursements for merchandise purchases for October:
	Budgeted merchandise purchase=$ 181350
	30% in the same month			(181350*30%)		54405
	Accounts payable collected					155600
	Budgeted cash disbursment					210005
d.	The budgeted net operating income for October:
					$	$
	Sales					400000
	Less: cost of goods sold					180000
	Gross profit					220000
	Less:
	Selling and administrative expenses				86000
	Depreciation				2790	88790
	Net operating income					131210
e.	budgeted balance sheet at October 31:
						$
	Assets
	Cash	(Note:1)				141595
	Accounts receivable (Note:2)					156000
	Inventory		(From b.)			55350
	Buildings and equipment			(279000-2790)		276210
	Total assets					629155
	Liabilities and Stockholders’ Equity
	Accounts payable		(Note:3)			126945
	Common stock					216000
	Retained earnings		(Add net operating income)			286210
	Total liabilities and stockholders’ equity					629155
	Note:1-Cash balance
							$
	Beginning balance						71600
	Add: Budgeted cash collection						366000
							437600
	Less: Budgeted cash disbursement for merchandise					210005
	Selling and administrative expenses					86000	296005
	Ending balance						141595
	Note:2-Accounts receivable balance=60% of credit sales=260000*60%=$ 156000
	Note:3-Accounts payable balance=70% of purchases=181350*70%=$ 126945
2
a.	The budgeted cash collections for October:
	Budgeted sales=$400000.
	Cash sales=400000*35%=140000 (a)
	Credit sales=400000*65%=260000
	50% of credit sales collected in october=260000*50%=$ 130000 (b)
	Accounts receivable collected in october=$122000 (c)
	Budgeted cash collection=(a)+(b)+©=140000+130000+122000=$ 392000
b.	The budgeted merchandise purchases for October:
	Cost of goods sold=Beginning inventory+Purchase-Ending inventory
	Rearrange this formula to get budgeted merchandise purchase
	Purchase=Ending inventory+cost of goods sold-beginning inventory
	Ending inventory=10% of following months cost of goods sold
	Following months cost of goods sold=Following months sales*45%=410000*45%=$ 184500
	Ending inventory=184500*10%=$ 18450
	Cost of goods sold for october=400000*45%=$ 180000
	Beginning inventory=$ 54000
	Purchase=18450+180000-54000=$ 144450
c.	The budgeted cash disbursements for merchandise purchases for October:
	Budgeted merchandise purchase=$ 144450
	20% in the same month			(144450*20%)		28890
	Accounts payable collected					155600
	Budgeted cash disbursment					184490
d.	The budgeted net operating income for October:
					$	$
	Sales					400000
	Less: cost of goods sold					180000
	Gross profit					220000
	Less:
	Selling and administrative expenses				86000
	Depreciation				2790	88790
	Net operating income					131210
e.	budgeted balance sheet at October 31:
						$
	Assets
	Cash	(Note:1)				193110
	Accounts receivable (Note:2)					130000
	Inventory		(From b.)			18450
	Buildings and equipment			(279000-2790)		276210
	Total assets					617770
	Liabilities and Stockholders’ Equity
	Accounts payable		(Note:3)			115560
	Common stock					216000
	Retained earnings		(Add net operating income)			286210
	Total liabilities and stockholders’ equity					617770
	Note:1-Cash balance
							$
	Beginning balance						71600
	Add: Budgeted cash collection						392000
							463600
	Less: Budgeted cash disbursement for merchandise					184490
	Selling and administrative expenses					86000	270490
	Ending balance						193110
	Note:2-Accounts receivable balance=50% of credit sales=260000*50%=$ 130000
	Note:3-Accounts payable balance=80% of purchases=144450*80%=$ 115560