Question

The budget committee of Suppar Company collects the following data for its San Miguel Store in preparing budgeted income statements for May and June 2017.

1.		Sales for May are expected to be $803,000. Sales in June and July are expected to be 5% higher than the preceding month.
2.		Cost of goods sold is expected to be 75% of sales.
3.		Company policy is to maintain ending merchandise inventory at 10% of the following month’s cost of goods sold.
4.		Operating expenses are estimated to be as follows:

Sales salaries		$30,000		per month
Advertising		6	%	of monthly sales
Delivery expense		2	%	of monthly sales
Sales commissions		5	%	of monthly sales
Rent expense		$5,390		per month
Depreciation		$910		per month
Utilities		$710		per month
Insurance		$560		per month

QUESTION

Prepare budgeted multiple-step income statements for each month in columnar form. Show in the statements the details of cost of goods sold. (Round answers to 0 decimal places, e.g. 2,500.)

Answer 1

Solution:

Suppar Company

San Miguel Store

Budget Income Statement for May and June 2017

Particulars	May ($)	June ($)
Expected Sales	803,000	843,150 (WN1)
Less: Cost of goods sold
Beginning merchandise Inventory (WN2)	60,225	63,236
Add: Merchandise Inventory purchased (WN2)	605,261	635,525
Less: Ending merchandise Inventory (WN2)	63,236	66,398
Cost of goods sold (Sales X 75%)	602,250	632,363
Gross Profit (Expected sales-cost of goods sold)	200,750	210,787
Operating expenses
Sales salaries	30,000	30,000
Advertising (6% of monthly sales)	48,180	50,589
Delivery expense (2% of monthly sales)	16,060	16,863
Sales commissions (5% of monthly sales)	40,150	42,158
Rent expense	5,390	5,390
Depreciation	910	910
Utilities	710	710
Insurance	560	560
Total Operating expenses	141,960	147,180
Net Income (Gross Profit – Total operating expenses)	58,790	63,607

Working Notes (WN):

1. June sales: $ 803,000 + 5% of $ 803,000 = $ 803,000 + $ 40,150 = $ 843,150

   July sales: $843,150 + 5% of $843,150 =$843,150 + $ 42,158 = $ 885,308

2. Cost of Goods Sold: Sales x 75%

= $803,000 x .75 = $602,250 (May)

= $843,150 x .75 = $632,363 (June)

= $885,308x .75 = $663,981 (July)

Ending merchandise Inventory: COGS from next month x 10%

= $632,363 x .10 = $63,236 (May)

= $663,981 x .10 = $66,398 (June)

Beginning merchandise Inventory: COGS x 10%

*May beginning inventory would be same as April ending inventory.

As per company policy April ending inventory

= 10% of May Cost of goods sold

= $602,250 x .10 = $60,225 (May)

**May Ending Inventory will be June Beginning inventory.

Particulars	May ($)	June ($)
Cost of goods sold	602,250	632,363
Add: Ending inventory	63,236	66,398
Less: Beginning inventory	(60,225)*	(63,236)**
Merchandise Inventory purchased	605,261	635,525