Question

Problem 8-20 Cash Budget; Income Statement; Balance Sheet; Changing Assumptions [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

Minden Company is a wholesale distributor of premium European chocolates. The company’s balance sheet as of April 30 is given below:

Minden Company Balance Sheet April 30
Assets
Cash	$	9,000
Accounts receivable		54,000
Inventory		30,000
Buildings and equipment, net of depreciation		207,000
Total assets	$	300,000
Liabilities and Stockholders’ Equity
Accounts payable	$	63,000
Note payable		14,500
Common stock		180,000
Retained earnings		42,500
Total liabilities and stockholders’ equity	$	300,000

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

1. Sales are budgeted at $220,000 for May. Of these sales, $60,000 will be for cash; the remainder will be credit sales. Each month’s credit sales are collected 60% in the month of sale and 40% in the month following the sale. All of the April 30 accounts receivable will be collected in May.

2. Purchases of inventory are expected to total $120,000 during May. These purchases will all be on account. The company pays for 50% of its merchandise purchases in the month of the purchase and the remaining 50% in the month following the purchase. All of the April 30 accounts payable to suppliers will be paid during May.

3. The May 31 inventory balance is budgeted at $40,000.

4. Selling and administrative expenses for May are budgeted at $72,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,000 for the month.

5. The note payable on the April 30 balance sheet will be paid during May, with $100 in interest. (All of the interest relates to May.)

6. New refrigerating equipment costing $6,500 will be purchased for cash during May.

7. During May, the company will borrow $20,000 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

Required:

1. Calculate the expected cash collections for May.

2. Calculate the expected cash disbursements for merchandise purchases for May.

3. Prepare a cash budget for May.

4. Prepare a budgeted income statement for May.

5. Prepare a budgeted balance sheet as of May 31.

Answer 1

Solutions:

Minden Company
Schedule of Expected Cash collection
Cash Sales of May	60000
Collection of Accounts Receivable:
April 30 Balance	54000
May Credit sales [(220000-60000)*1/2]	80000
Total Cash collection	194000
Minden Company
Schedule of Expected Cash disbursement
April 30 Accounts payable balance	63000
May Purchases (120000*50%)	60000
Total Cash disbursement	123000
Minden Company
Cash Budget
Beginning Cash Balance	9000
Add: Collection from customers	194000
Total cash available	203000
Less: Cash Disbursement:
Purchase of Inventory	123000
Selling and administrative expenses	72000
Purchases of Equipment	6500
Total Cash disbursement	201500
Excess of cash available over disbursement	1500
Financing:
Borrowing-Note	20000
Repayments-Note	-14500
Interest	-100
Total Financing	5400
Ending cash Balance	6900
Minden Company
Budgeted Income Statement
For the month of May
Sales	220000
Less: Cost of goods sold (30000+120000-40000)	110000
Gross Margin	110000
Less: Selling and administrative expenses (72000+2000)	74000
Net Operating income	36000
Less: Interest expense	100
Net Income	35900
Minden Company
Budgeted Balance Sheet
May-31
Assets
Cash	6900
Accounts receivable	80000
Inventory	40000
Building and Equipment, net of Depreciation (207000-2000+6500)	211500
Total Assets	338400
Liabilities and Stockholders' Equity
Accounts Payable (120000*50%)	60000
Notes payable	20000
Common stock	180000
Retained earnings (42500+35900)	78400
Total Liabilities and Stockholders' Equity	338400