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	$	68,400
Accounts receivable		35,600
Inventory		67,300
Buildings and equipment, net of depreciation		179,000
Total assets	$	350,300
Liabilities and Stockholders’ Equity
Accounts payable	$	155,600
Common stock		70,000
Retained earnings		124,700
Total liabilities and stockholders’ equity	$	350,300

Budgeted Income Statements
	April			May			June
Sales	$	191,000		$	201,000		$	221,000
Cost of goods sold		114,600			120,600			132,600
Gross margin		76,400			80,400			88,400
Selling and administrative expenses		16,900			18,400			21,400
Net operating income	$	59,500		$	62,000		$	67,000

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 $231,000.

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 $1,400 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. Expected cash collections for April, May, and June

	Transaction	April	May	June
A	Cash Collection Against Sale of Previous Month (80% x (40% of Sale))	35,600	61,120	64,320
B	Total Sales	1,91,000	2,01,000	2,21,000
C	Cash Sales - 60% of Total Sales	1,14,600	1,20,600	1,32,600
D	Credit Sales - 40% of Total Sales	76,400	80,400	88,400
E	Collection against credit sale 20%	15,280	16,080	17,680
	Expected cash collections (A + C + E)	1,65,480	1,97,800	2,14,600

2. Budgeted merchandise purchases for April, May, and June

	Transaction	April	May	June
A	Opening Inventory	67,300	70,300	76,300
B	Cost of Goods Sold	1,14,600	1,20,600	1,32,600
C	Ending Inventory (10000 + 50% of the next month’s cost of goods sold)	70,300	76,300	79,300
D	Budgeted Merchandise Purchases (B + C - A)	1,17,600	1,26,600	1,35,600

3. Expected cash disbursements for merchandise purchases for April, May, and June.

	Transaction	April	May	June
A	Opening Payable against Previous Month Purchase	1,55,600	1,05,840	1,13,940
B	Budgeted Merchandise Purchases	1,17,600	1,26,600	1,35,600
C	10% of Current Months merchandise purchases	11,760	12,660	13,560
D	Budgeted Payment Merchandise Purchases (A + C)	1,67,360	1,18,500	1,27,500

4. Budgeted balance sheet at June 30th

Deacon Company
Balance Sheet
Jun-30
Assets
Cash	1,76,220
Accounts receivable	70,720
Inventory	79,300
Buildings and equipment, net of depreciation	1,74,800
Total assets	5,01,040
Liabilities and Stockholders’ Equity
Accounts payable	1,22,040
Common stock	70,000
Retained earnings	3,09,000
Total liabilities and stockholders’ equity	5,01,040

Cash
Opening Balance	68400
(+) Cash Collection from Sales	577880
(-) Cash Payment Against Purchase	-413360
(-) Cash Payment Against Expences	-56700
	176220

Retained earnings
Opening Balance	1,24,700
(+) Net Operating Income	1,88,500
(-) Depreciation (1400 x 3)	-4,200
	3,09,000