Question

Hamby Corporation is a merchandising company that is preparing a master budget for the third quarter of the calendar year. The company’s balance sheet as of June 30th is shown below:

Hamby Corporation
Balance Sheet
June 30
Assets
Cash	$	95,000
Accounts receivable		142,000
Inventory		54,000
Plant and equipment, net of depreciation		225,000
Total assets	$	516,000
Liabilities and Stockholders’ Equity
Accounts payable	$	86,000
Common stock		332,000
Retained earnings		98,000
Total liabilities and stockholders’ equity	$	516,000

The company managers have made the following additional assumptions and estimates:

1. Estimated sales for July, August, September, and October will be $360,000, $380,000, $370,000, and $390,000, respectively.

2. All sales are on credit and all credit sales are collected. Each month’s credit sales are collected 35% in the month of sale and 65% in the month following the sale. All of the accounts receivable at June 30 will be collected in July.

3. Each month’s ending inventory must equal 25% 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.

4. Monthly selling and administrative expenses are always $48,000. Each month $7,000 of this total amount is depreciation expense and the remaining $41,000 relates to expenses that are paid in the month they are incurred.

5. The company does not plan to borrow money or pay or declare dividends during the quarter ended September 30. The company does not plan to issue any common stock or repurchase its own stock during the quarter ended September 30.

How much is the Company's expected merchandise purchases in the month of September?

Multiple Choice

• $225,000

• $280,500

• $226,500

• $219,000

Answer 1

It is the company's policy that they purchase 25% of the cost of goods sold of the next month and 75% of the cost of goods sold of the same month.

Therefore in the month of September the company will purchase 25% of the cost of goods sold of the next month i.e. October and 75% of the cost of goods sold of the same month.

Cost of Goods sold for October = Sales * 60% = $390,000*60% = $234,000

Therefore, 25% of Cost of Goods sold for October = 25% of $234,000 = $58,500

Cost of Goods sold for Septemebr = Sales * 60% = $370,000*60% = $222,000

Therefore, 75% of Cost of Goods sold for September = 75% of $222,000 = $166,500

Therefore, Company's expected merchandise purchases in the month of September = $58,500 + $166,500 =$225,000