Question

Question 1

Amway Company, a merchandising firm that sells one product, estimates it will sell 17,000 units of its product at $63 per unit in December. In November, the company prepared other information to prepare a budget for December, as shown here:

Merchandise inventory, December 1	2200 units
Desired merchandise inventory for December 31	2800 units
Cost per unit of merchandise purchases	$38.00
Selling and administrative expenses	$175,000.00
Cash balance, December 1	$42,000.00
November sales	$640,000.00

·        The company estimates that 60% of each month's sales are collected in the month of sale and that the remaining 40% is collected in the month after the sale.

·        The $175,000 of selling and administrative expenses includes $30,000 of depreciation.

· the company pays for half of the merchandise purchases during the month of purchase and pays the remainder during the month following purchase. Estimated merchandise purchases for November are $384,000.

·        All other out-of-pocket expenses are paid for in cash.

Requirements

a)     How many units of merchandise will Amway budget to purchase in December? What is the dollar amount of Amway's budgeted merchandise purchases for December?

b)     Prepare a budgeted income statement for the month ended December for Amway Company.

c)      Prepare a statement of estimated cash flows for the month ended December for Amway Company.

Merchandise Inventory:	Unit	Dollar Value
Inventory needs
Budgeted purchases

Answer 1

• All working forms part of the answer
• Requirement ‘a’

	Merchandise Inventory:	Unit	Dollar Value
A	Budgeted Sales	17000	$               10,71,000.00
B	Desired Ending Inventory	2800
C = A+B	Inventory needs	19800
D	Beginning Inventory	2200
E = C - D	Budgeted purchases	17600	$                 6,68,800.00

• Requirement ‘b’

Working for Cost of Goods Sold

		Units	Amount
A	Beginning Inventory	2200	$                     83,600.00
B	Purchases	17600	$                 6,68,800.00
C=A+B	Cost of Goods Available for sale	19800	$                 7,52,400.00
D	Ending Inventory	2800	$                 1,06,400.00
E=C - D	Cost of Goods Sold	17000	$                 6,46,000.00

---Budgeted Income Statement for month ended December

A	Sales revenue [17000 x $63]	$                                   10,71,000.00
B	Cost of Goods Sold	$                                     6,46,000.00
C=A-B	Gross Profits	$                                     4,25,000.00
D	Selling & Administrative expense	$                                     1,75,000.00
E=C-D	Net Operating Income/Net Income	$                                     2,50,000.00

• Requirement ‘c’

Working for cash collected in Nov and Dec

	November	December
Total Sales	$                                     6,40,000.00	$               10,71,000.00
Cash collected in for:
November Sale	$                                     3,84,000.00	$                 2,56,000.00
December Sale		$                 6,42,600.00
Total Cash collected	$                                     3,84,000.00	$                 8,98,600.00

Working for cash payments for purchases in Nov and Dec

	November	December
Purchases	$                                     3,84,000.00	$                 6,68,800.00
Cash paid for purchases of:
November	$                                     1,92,000.00	$                 1,92,000.00
December		$                 3,34,400.00
Total cash paid for purchases	$                                     1,92,000.00	$                 5,26,400.00

---Answer: Statement of Estimated cash Flows

A	Beginning balance	$                                         42,000.00
B	Cash collected (or Inflows)	$                                     8,98,600.00
C=A+B	Total cash available	$                                     9,40,600.00
	Cash disbursement (or Outflows)
D	Cash paid for purchases	$                                     5,26,400.00
E = $175000 - depreciation of $30,000	Cash paid for Selling & administrative expenses	$                                     1,45,000.00
F = D + E	Total Cash Outflows	$                                     6,71,400.00
G = C - F	Cash Ending Balance	$                                     2,69,200.00