Question

Wheeling Company is a merchandiser that provided a balance sheet as of September 30 as shown below: Wheeling Company Balance Sheet September 30 Assets Cash $ 59,000 Accounts receivable 90,000 Inventory 32,400 Buildings and equipment, net of depreciation 214,000 Total assets $ 395,400 Liabilities and Stockholders’ Equity Accounts payable $ 73,000 Common stock 216,000 Retained earnings 106,400 Total liabilities and stockholders’ equity $ 395,400 The company is in the process of preparing a budget for October and has assembled the following data: Sales are budgeted at $240,000 for October and $250,000 for November. Of these sales, 35% will be for cash; the remainder will be credit sales. Forty percent of a month’s credit sales are collected in the month the sales are made, and the remaining 60% is collected in the following month. All of the September 30 accounts receivable will be collected in October. The budgeted cost of goods sold is always 45% of sales and the ending merchandise inventory is always 30% of the following month’s cost of goods sold. All merchandise purchases are on account. Thirty percent of all purchases are paid for in the month of purchase and 70% are paid for in the following month. All of the September 30 accounts payable to suppliers will be paid during October. Selling and administrative expenses for October are budgeted at $78,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,000 for the month. Required: 1. Using the information provided, calculate or prepare the following: a. The budgeted cash collections for October. b. The budgeted merchandise purchases for October. c. The budgeted cash disbursements for merchandise purchases for October. d. The budgeted net operating income for October. e. A budgeted balance sheet at October 31. 2. Assume the following changes to the underlying budgeting assumptions: (1) 50% of a month’s credit sales are collected in the month the sales are made and the remaining 50% is collected in the following month, (2) the ending merchandise inventory is always 10% of the following month’s cost of goods sold, and (3) 20% of all purchases are paid for in the month of purchase and 80% are paid for in the following month. Using these new assumptions, calculate or prepare the following: a. The budgeted cash collections for October. b. The budgeted merchandise purchases for October. c. The budgeted cash disbursements for merchandise purchases for October. d. Net operating income for the month of October. e. A budgeted balance sheet at October 31.

Answer 1

1.

a.

Schedule of cash collections
Cash Sales	84000
Credit Sales:
September sales	90000
October Sales	62400
Total Collections	236400

b.

Purchase Budget
	October
Cost of goods sold (45% of sales)	108000
Add: Desired ending inventory	33750
Total needed	141750
Less: Beginning inventory	32400
Budgeted Purchases	109350

.

c.

Cash disbursement for purchases
	October
September purchases	73000
October Purchases	32805
Total payments for purchases	105805
Accounts Payable	76545

d.

Wheeling Company
Budgeted Income Statement
for the month of October
	October
Sales	240000
Cost of goods sold	108000
Gross Profit	132000
Operating Expenses:
Selling and administrative expenses	78000
Depreciation Expense	2000
Total Operating Expenses	80000
Net Income	52000

e.

Wheeling Company
Budgeted Balance Sheet
as at October 31
Assets
Cash	111595
Accounts Receivable	93600
Inventory	33750
Building and equipment, net	212000
Total Assets	450945
Liabilities and Stockholders' Equity
Accounts Payable	76545
Common Stock	216000
Retained Earnings:
Balance as at October 1	106400
Net income for the month	52000
Balance as at October 31	158400
Total stockholders' equity	374400
Total Liabilities and Stockholders' Equity	450945

Cash Budget For October
	October
Beginning Cash Balance	59000
Cash Collections from Sales	236400
Cash available for disbursements	295400
Cash disbursements:
Purchase of inventory	105805
Operating Expenses	78000
Total Cash Payments	183805
Cash Surplus	111595
Ending Cash Balance	111595

2.

a.

Schedule of cash collections
Cash Sales	84000
Credit Sales:
September sales	90000
October Sales	78000
Total Collections	252000

b.

Purchase Budget
	October
Cost of goods sold (45% of sales)	108000
Add: Desired ending inventory	11250
Total needed	119250
Less: Beginning inventory	32400
Budgeted Purchases	86850

c.

Cash disbursement for purchases
	October
September purchases	73000
October Purchases	17370
Total payments for purchases	90370
Accounts Payable	69480

d.

Wheeling Company
Budgeted Income Statement
for the month of October
	October
Sales	240000
Cost of goods sold	108000
Gross Profit	132000
Operating Expenses:
Selling and administrative expenses	78000
Depreciation Expense	2000
Total Operating Expenses	80000
Net Income	52000

e.

Wheeling Company
Budgeted Balance Sheet
as at October 31
Assets
Cash	142630
Accounts Receivable	78000
Inventory	11250
Building and equipment, net	212000
Total Assets	443880
Liabilities and Stockholders' Equity
Accounts Payable	69480
Common Stock	216000
Retained Earnings:
Balance as at October 1	106400
Net income for the month	52000
Balance as at October 31	158400
Total stockholders' equity	374400
Total Liabilities and Stockholders' Equity	443880

Cash Budget For October
	October
Beginning Cash Balance	59000
Cash Collections from Sales	252000
Cash available for disbursements	311000
Cash disbursements:
Purchase of inventory	90370
Operating Expenses	78000
Total Cash Payments	168370
Cash Surplus	142630
Ending Cash Balance	142630