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	$	59,000
Accounts receivable		90,000
Inventory		32,400
Buildings and equipment, net of depreciation		214,000
Total assets	$	395,400
Liabilities and Stockholders’ Equity
Accounts payable	$	73,000
Common stock		216,000
Retained earnings		106,400
Total liabilities and stockholders’ equity	$	395,400

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

1. Sales are budgeted at $240,000 for October and $250,000 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.

2. 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.

3. 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.

4. Selling and administrative expenses for October are budgeted at $78,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,000 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

Ans(1-a) Computation of budgeted cash collection for the month of October are as follow:

The following information has been given in the question,

• Budgeted Sales for October = $240,000 out of which 35% is cash sales which amounts to $84,000.

Therefore Credit sales would be = $240,000 - $84,000 = $156,000

• Accounts Receivable of September 30, which is $90,000 will be collected in October month.
• 40% of credit sales are collected in the month of sales, remaining 60% will be collected in next month. Therefore $156,000 x 40% = $62,400 will be collected in the month of October.

Using the values and information provided,

Ans(1-b) Computation of budgeted Merchandise Purchase for the month of October are as follow:

The following formula will be used:

Beginning Inventory + Purchase - Ending Inventory = Cost of Goods Sold

where,

Purchase = Cost of Goods sold + Ending Inventory - Beginning Inventory

Following information has been provided in the question:

Beginning Inventory =$32,400

Cost of Goods Sold = 45% of Sales

Budgeted Sales of October = $240,000

Cost of Goods Sold for October =$240,000 x 45% = $108,000

Ending Inventory = 30% of following month's cost of goods sold

Cost of Goods sold for November = $250,000 x 45% =$112,500

Ending inventory = $112,500 x 30% = $33,750

using the above information,

Purchase = Cost of Goods sold + Ending Inventory - Beginning Inventory

= $108,000 + $33,750 - $32,400

= $109,350

Ans(1-c) Computation of budgeted cash disbursement for Merchandise Purchase for the month of October are as follow:

The following information has been provided in the question:

• All merchandise purchase are on credit.
• Accounts Payable $73,000 on September 30, paid in the month of October.
• 30% of purchase paid in the month of purchase therefore $109,350 x 30% = $32,805

Using the above information and values given in the question,

Ans(1-d) Computation of budgeted net operating income for the month of October are as follow: