Question

Carter Lumber sells lumber and general building supplies to building contractors in a medium-sized town in Montana. Data regarding the store's operations follow:

o Sales are budgeted at $380,000 for November, $390,000 for December, and $400,000 for January.

o Collections are expected to be 70% in the month of sale, 27% in the month following the sale, and 3% uncollectible.

o The cost of goods sold is 65% of sales.

o The company desires to have an ending merchandise inventory equal to 80% of the following month's cost of goods sold. Payment for merchandise is made in the month following the purchase.

o Other monthly expenses to be paid in cash are $22,000.

o Monthly depreciation is $20,000.

o Ignore taxes.

Balance Sheet October 31 Assets

Cash $13,000

Accounts receivable, net of allowance for uncollectible accounts 77,000

Inventory 197,600

Property, plant and equipment, net of $502,000 accumulated depreciation 992,000

Total assets $1,279,600

Liabilities and Stockholders' Equity

Accounts payable $240,000

Common stock 780,000

Retained earnings 259,600

Total liabilities and stockholders' equity $1,279,600

The accounts receivable balance, net of uncollectible accounts, at the end of December would be:

$207,900 $105,300 $117,000 $88,700 The cash balance at the end of December would be: $182,400 $13,000 $114,400 $195,400 Retained earnings at the end of December would be: $259,600 $445,100 $422,000 $342,400

Answer 1

Solution:

Part 1 --- Calculation of accounts receivable balance, net of uncollectible accounts, at the end of December

December total sales	$390,000
Less: 70% collected in the month (390,000*70%)	($273,000)
Accounts Receivable, gross at the end of December	$117,000
Less: 3% Uncollectible Account ($390,000*3%)	($11,700)
Accounts Receivable, Net of uncollectible account at the end of December	$105,300

Hence, the correct option is $105,300

Part 2 -- Cash balance at the end of December – Correct option is $195,400

Cash Budget for November and December

	November	December
Beginning cash balance	$13,000	$94,000
Add: Cash Collections from Credit Sales (Refer part 1)	$343,000	$375,600
Total cash available	$356,000	$469,600
Less: Cash disbursements
Purchases (Refer Note 2)	$240,000	$252,200
other monthly expense	$22,000	$22,000
Total Cash disbursements	$262,000	$274,200
Ending Cash Balance (Cash Available - Cash Disbursements)	$94,000	$195,400

Hence, correct option is $195,400

Note 1 --- Cash Collection

	November	December	Total
Budgeted Sales Gross	$380,000	$390,000	$770,000
Collection Schedule:
Accounts Receivable Beginning, net of uncollectible (Collected in November month)	$77,000
70% of November Sales collected in November	$266,000
27% of November Sales Collected in December		$102,600
70% of December Sales collected in December		$273,000
Total Cash Collection	$343,000	$375,600	$718,600

Note 2

Schedule of Expected Cash Disbursement of Merchandise Purchases
	November	December	January
Cost of Goods Sold (65% of Sales)	$247,000	$253,500	$260,000
Add: Ending Inventory of Material (80% of following month's COGS)	$202,800	$208,000
Total Needs	$449,800	$461,500
Less: Beginning Inventory of Material	$197,600	$202,800
Total Budgeted Required Purchases	$252,200	$258,700
Schedule of Cash Disbursement for Merchandise Purchases
Accounts Payable beginning	$240,000
November Purchases paid in December		$252,200
Total Cash Disbursement for Purchase	$240,000	$252,200

Part 3 – Retained Earnings at the end of December – Correct option is $422,000

We need to prepare profit and loss account and Retained Earnings statement

Statement of Retained Earnings
	$$
Retained Earnings, beginning	$259,600
Add: Profit of Nov and Dec (Refer Note 3)	$162,400
Retained Earnings, Ending	$422,000

Note 3 --

Profit and Loss Account
	November	December	Total
Budgeted Sales, Net of Uncollectible (Sales*97%)	368600	378300	746900
Cost of Goods Sold (refer note 2)	247000	253500	500500
Gross Profit	121600	124800	246400
Less: Operating Expenses:
Monthly Expenses	$22,000	$22,000	$44,000
Depreciation Expense	$20,000	$20,000	$40,000
Total Operating Expenses	$42,000	$42,000	$84,000
Operating Income (Gross Profit - Total Operating Expense)	$79,600	$82,800	$162,400

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you