Question

Hugo Medical Supply has applied for a loan. Pacific Commerce Bank has requested a budgeted balance sheet as of April 30 and a combined cash budget for April. As Hugo Medical Supply's controller, you have assembled the following information: (a) March 31 equipment balance, $52,600; accumulated depreciation, $41,300 (b) April capital expenditures of $42,400 budgeted for cash purchase of equipment (c) April depreciation expense, $700 (d) Cost of goods sold, 60% of sales (e) Other April operating expenses, including income tax, total $14,200, 35% of which will be paid in cash and the remainder accrued at April 30 (f) March 31 owners' equity, $92,600 (g) March 31 cash balance, $40,300 (h) April budgeted sales, $90,000, 70% of which is for cash. Of the remaining 30%, half will be collected in April and half in May. (i) April cash collections on March sales, $29,100 (j) April cash payments of March 31 liabilities incurred for March purchases of inventory, $17,300 (k) March 31 inventory balance, $29,200 (l) April purchases of inventory, $10,700 for cash and $36,300 on credit. Half of the credit purchases will be paid in April and half in May. Before granting a loan to Hugo Medical Supply, Pacific Commerce Bank asks for a sesitivity analysis assuming that Aptil sales are only $60,000 rather than the $90,000 originally budgeted. (While the cost of goods sold will change, assume that purchases, depreciation, and the other operating expenses will remain the same.) (1) Prepare a budgeted balance sheet for Hugo Medical Supply, showing separate computations for cash, inventory, and owners' equity balances. (2) Suppose Hugo Medical Supply has a minimum deisred cash balance of $25,000. Will the company need to borrow money in April?

Answer 1

1.

Budgeted Balance Sheet
Assets
Cash		52380
Accounts Receivable		13500
Inventory		22200
Equipment	95000
Less: Accumulated depreciation	42000	53000
Total Assets		141080
Liabilities
Accounts Payable		18150
Accured expenses		9230
Total liabilities		27380
Owners' Equity		113700
Total liabilities and owners' Equity		141080
Accoutns Receivable
Beginning	29100
Add: Sales	90000
Total	119100
Less: Collections	105600
Ending balance	13500
Inventory
Beginning	29200
Add: Purchases	47000
Total	76200
Less: Cost of goods sold	54000
Ending balance	22200
Accounts Payable
Beginning	17300
Add: Purchases	36300
Total	53600
Less: Payments	35450
Ending balance	18150
Equipment
Beginning	52600
Add: Purchases	42400
Ending balance	95000
Accumulated Depreciation
Beginning	41300
Add: Depreciation expense	700
Ending balance	42000
Owners' Equity
Beginning	92600
Add: net Income	21100
Ending	113700

Working:

Schedule of cash collections
Collections for March sales	29100
Cash sales in April (70% of $90,000)	63000
Credit sales (50% of $27,000)	13500
Total cash collection	105600
Cash payment for inventory
Payment for March purchases	17300
April purchases
Cash purchases	10700
Credit purchases (50% of $36,300)	18150
Total cash payment for inventory	46150
Cash Budget
April 30
Beginning cash balance	40300
Cash collections from sales	105600
Total cash available for disbursements	145900
Cash disbursements:
for purchase of inventory	46150
for operating expenses	4970
for capital expenditure	42400
Total cash disbursements	93520
Cash surplus / (deficit)	52380
Minimum cash balance	25000
Cash excess / (shortage)	27380
Ending cash balance	52380
Budgeted Income Statement
Sales	90000
Cost of goods sold (60% of sales)	54000
Gross profit	36000
Operating expenses:
Depreciation expense	700
Other operating expenses	14200
Total operating expenses	14900
Net income	21100

2. the company does not need to borrow money in April, as there is sufficient cash balance.

If the sales are only $60,000

Budgeted Balance Sheet
Assets
Cash		26880
Accounts Receivable		9000
Inventory		40200
Equipment	95000
Less: Accumulated depreciation	42000	53000
Total Assets		129080
Liabilities
Accounts Payable		18150
Accrued expenses		9230
Total liabilities		27380
Owners' Equity		101700
Total liabilities and owners' Equity		129080
Accoutns Receivable
Beginning	29100
Add: Sales	60000
Total	89100
Less: Collections	80100
Ending balance	9000
Inventory
Beginning	29200
Add: Purchases	47000
Total	76200
Less: Cost of goods sold	36000
Ending balance	40200
Accounts Payable
Beginning	17300
Add: Purchases	36300
Total	53600
Less: Payments	35450
Ending balance	18150
Equipment
Beginning	52600
Add: Purchases	42400
Ending balance	95000
Accumulated Depreciation
Beginning	41300
Add: Depreciation expense	700
Ending balance	42000
Owners' Equity
Beginning	92600
Add: net Income	9100
Ending	101700

Schedule of cash collections
Collections for March sales	29100
Cash sales in April (70% of $60,000)	42000
Credit sales (50% of $18,000)	9000
Total cash collection	80100
Cash payment for inventory
Payment for March purchases	17300
April purchases
Cash purchases	10700
Credit purchases (50% of $36,300)	18150
Total cash payment for inventory	46150
Cash Budget
April 30
Beginning cash balance	40300
Cash collections from sales	80100
Total cash available for disbursements	120400
Cash disbursements:
for purchase of inventory	46150
for operating expenses	4970
for capital expenditure	42400
Total cash disbursements	93520
Cash surplus / (deficit)	26880
Minimum cash balance	25000
Cash excess / (shortage)	1880
Ending cash balance	26880
Budgeted Income Statement
Sales	60000
Cost of goods sold (60% of sales)	36000
Gross profit	24000
Operating expenses:
Depreciation expense	700
Other operating expenses	14200
Total operating expenses	14900
Net income	9100