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	$	77,400
Accounts receivable		146,000
Inventory		70,200
Buildings and equipment, net of depreciation		280,000
Total assets	$	573,600
Liabilities and Stockholders’ Equity
Accounts payable	$	251,100
Common stock		216,000
Retained earnings		106,500
Total liabilities and stockholders’ equity	$	573,600

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

Sales are budgeted at $520,000 for October and $530,000 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 $80,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,800 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) Calculation of Budgeted Cash Collections for October

Total Sales in October = $520,000

Cash Sales in October = $520,000*35% = $182,000

Credit Sales = Total Sales - Cash Sales

= $520,000 - $182,000 = $338,000

Cash Collections in October = Cash Sales+40% of October Credit Sales+Accounts Receivable September

= $182,000+(40%*$338,000)+$146,000

= $182,000+$135,200+$146,000 = $463,200

Therefore budgeted cash collections for October is $463,200.

b) Calculation of Budgeted Merchandise Purchases for October

Cost of goods sold for Novemeber = Sales in November*45%

= $530,000*45% = $238,500

Ending Merchandise Inventory for October = COGS in October*30%

= $238,500*30% = $71,550

Beginning Merchandise Inventory = $70,200

Cost of Goods Sold in October = Sales*45%

= $520,000*45% = $234,000

Budgeted Merchandise Purchases for October = COGS+Ending Inventory-Beginning Inventory

= $234,000+$71,550-$70,200 = $235,350

Therefore budgeted merchandise purchases for October is $235,350.

c) Calculation of budgeted cash disbursements for merchandise purchases for October

Cash Disbursements = 30% of October Purchases+September Accounts Payable

= ($235,350*30%)+$251,100 = $70,605+$251,100 = $321,705

d) Calculation of Net Operating Income for October (Amounts in $)

Sales (A)	520,000
Expenses
Cost of Goods Sold	234,000
Sales and Administrative Expenses	80,000
Depreciation Expenses	2,800
Total Expenses (B)	316,800
Net Operating Income (A-B)	203,200