Question

Millen Corporation is a merchandiser that is preparing a master budget for the month of July. The company’s balance sheet as of June 30th is shown below:

Millen Corporation
Balance Sheet
June 30
Assets
Cash $ 120,000
Accounts receivable 166,000
Inventory 37,200
Plant and equipment, net of depreciation 554,800
Total assets $ 878,000
Liabilities and Stockholders’ Equity
Accounts payable $ 93,000
Common stock 586,000
Retained earnings 199,000
Total liabilities and stockholders’ equity $ 878,000

Millen’s managers have made the following additional assumptions and estimates:

Estimated sales for July and August are $310,000 and $330,000, respectively.
Each month’s sales are 20% cash sales and 80% credit sales. Each month’s credit sales are collected 30% in the month of sale and 70% in the month following the sale. All of the accounts receivable at June 30 will be collected in July.
Each month’s ending inventory must equal 20% of the cost of next month’s sales. The cost of goods sold is 60% of sales. The company pays for 40% of its merchandise purchases in the month of the purchase and the remaining 60% in the month following the purchase. All of the accounts payable at June 30 will be paid in July.
Monthly selling and administrative expenses are always $70,000. Each month $10,000 of this total amount is depreciation expense and the remaining $60,000 relates to expenses that are paid in the month they are incurred.
The company does not plan to buy or sell any plant and equipment during July. It will not borrow any money, pay a dividend, issue any common stock, or repurchase any of its own common stock during July.

1. Calculate the estimated accounts receivable turnover and inventory turnover for the month of July.

1a. Calculate the estimated operating cycle for the month of July. (Hint: Use 30 days in the numerator to calculate the average collection period and the average sales period.)

1b. Using the indirect method, calculate the estimated net cash provided by operating activities for July.

Answer 1

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Working:
		July	August
Budgeted Sales		$            310,000	$330,000
Budgeted Cost of Goods Sold	60%	$            186,000	$198,000
Schedule for Cash Receipt:
		July
Accounts Receivable, June		$            166,000
Cash Sale for July	310000*20%	$              62,000
Credit Sale for July	310000*80%*30%	$              74,400
Collection from Sale		$            302,400
Accounts Receivable, July	310000*80%*70%	$            173,600
Budgeted Purchases:
Budgeted Cost of Goods sold		$            186,000
Add: Desired Ending Inventory	198000*20%	$              39,600
Total need		$            225,600
Less: Beginning Inventory		$            -37,200
Budgeted Purchases		$            188,400
Schedule for Cash payment for Inventory:
Accounts Payable, June		$              93,000
July Purchase	188400*40%	$              75,360
Payment for Purchases		$            168,360
Accounts Payable, July	188400*60%	$            113,040
Cash Budget
Beginning Balance		$            120,000
Add: Collection From Sale		$            302,400
Total Cash Available		$            422,400
Cash Payment for:
Purchases		$            168,360
Selling and Admin		$              60,000
Total Cash Payment		$            228,360
Ending Cash Balance		$            194,040
Budgeted Balance Sheet:
Cash		$            194,040
Accounts Receivable		$            173,600
Inventory		$              39,600
Plant and Equipment	554800-10000 Dep	$            544,800
Total Assets		$            952,040
Accounts Payable		$            113,040
Common Stock		$            586,000
Retained Earning	199000+54000 Net Income	$            253,000
Total Liabilities and Equity		$            952,040
Budgeted Income Statement
Sales		$            310,000
Less: Cost of Goods Sold		$            186,000
Gross Margin		$            124,000
Less: Selling and Admin Expense		$              70,000
Net Income		$              54,000
Part -1
Accounts Receivable Turnover	Sale/Average receivable	310000/169800	1.83
-Average Receivable	(166000+173600)/2	$            169,800
Inventory Turnver	Cost of Goods Sold/Average Inventory	186000/38400	4.84
-Average Invenotry	(37600+39200)/2	$              38,400
Part -1a
Average Collection Period	30/Receivable Turnover	30/1.83	16.43
Average Sales period	30/Inventory Turnover	30/4.84	6.19
Operating Cycle	Avg Coll Period+Avg Sales Period	16.43+6.19	22.63
Part -1b
Net Income		$              54,000
Adjustment to Net income:
Depreciation Expenses		$              10,000
Increase in Receivable		$               -7,600
Increase in inventory		$               -2,400
Increase in Accounts Payable		$              20,040
Net Cash flow from Operating Activities		$              74,040