Question

Deacon Company is a merchandising company that is preparing a budget for the three-month period ended June 30th. The following information is available

Deacon Company Balance Sheet March 31
Assets
Cash	$	62,600
Accounts receivable		37,200
Inventory		41,500
Buildings and equipment, net of depreciation		174,000
Total assets	$	315,300
Liabilities and Stockholders’ Equity
Accounts payable	$	113,100
Common stock		70,000
Retained earnings		132,200
Total liabilities and stockholders’ equity	$	315,300

Budgeted Income Statements
	April			May			June
Sales	$	105,000		$	115,000		$	135,000
Cost of goods sold		63,000			69,000			81,000
Gross margin		42,000			46,000			54,000
Selling and administrative expenses		15,400			16,900			19,900
Net operating income	$	26,600		$	29,100		$	34,100

Budgeting Assumptions:

60% of sales are cash sales and 40% of sales are credit sales. Twenty percent of all credit sales are collected in the month of sale and the remaining 80% are collected in the month subsequent to the sale.

Budgeted sales for July are $145,000.

10% of merchandise inventory purchases are paid in cash at the time of the purchase. The remaining 90% of purchases are credit purchases. All purchases on credit are paid in the month subsequent to the purchase.

Each month’s ending merchandise inventory should equal $10,000 plus 50% of the next month’s cost of goods sold.

Depreciation expense is $1,500 per month. All other selling and administrative expenses are paid in full in the month the expense is incurred.

Required:

1. Calculate the expected cash collections for April, May, and June.

2. Calculate the budgeted merchandise purchases for April, May, and June.

3. Calculate the expected cash disbursements for merchandise purchases for April, May, and June.

4. Prepare a budgeted balance sheet at June 30th. (Hint: You need to calculate the cash paid for selling and administrative expenses during April, May, and June to determine the cash balance in your June 30th balance sheet.)

Answer 1

1.

	April	May	June
Credit Sales (40% of Sales)	42000	46000	54000
20% of the Credit Sales	8400	9200	10800
80% of the credit Sales	37200	33600	36800
Cash Sales(60% of Sales)	63000	69000	81000
Expected Cash Collections	108600	111800	128600

2.

	April	May	June
Opening Balance [A]	41500	44500	50500
Cost of Goods Sold [B]	63000	69000	81000
Ending Inventory (10,000+50% of next month's COGS) [ C]	44500	50500	53500
Budgeted Merchandise Purchase [B+C -A]	66000	75000	84000

% of COGS of Sales = 63000/105000 = 60%

COGS for July = 145,000 * 60% = 87000

3.

	April	May	June
Budgeted Merchandise Purchase	66000	75000	84000
Cash purchases (10% of current month purchase)	6600	7500	8400
Credit purchases (90% of current month purchase)	113100	59400	67500
Expected cash disbursements	119700	66900	75900

4. Calculation of closing cash Balance

	April	May	June
Opening Cash Balance	62600	36100	64100
Expected Cash Collections	108600	111800	128600
Expected cash disbursements	-119700	-66900	-75900
Selling and administrative expenses	-15400	-16900	-19900
Closing cash Balance	36100	64100	96900

Balance Sheet:

Assets
Cash	96900
Accounts Receivable [54000-10800]	43200
Inventory [Closing merchandise inventory]	53500
Buildings and equipment ,net of depreciation [174000 - (1500*4)]	169500
Total Assets	363100
Liabilities
Accounts Payable [84000-8400]	75600
Common Stock	70000
Retained Earnings [132200+26600+29100+34100-4500]	217500
Total Liabilities and Stockholder's Equity	363100