Question

The Peoria Supply Company sells for $30 one product that it purchases for $20. Budgeted sales in total dollars for next year are $720,000. The sales information needed for preparing the July budget follows:

Month Sales Revenue
May $30,000
June 42,000
July 51,000
August 54,000

Account balances at July 1 include these:

Cash $20,000
Merchandise inventory 18,000
Accounts receivable (sales) 23,000
Accounts payable (purchases) 12,000

The company pays for one-half of its purchases in the month of purchase and the remainder in the following month. End-of-month inventory must be 50 percent of the budgeted sales in units for the next month. A 2 percent cash discount on sales is allowed if payment is made during the month of sale. Experience indicates that 50 percent of the billings will be collected during the month of sale, 40 percent in the following month, 8 percent in the second following month, and 2 percent will be uncollectible. Total budgeted selling and administrative expenses (excluding bad debts) for the fiscal year are estimated at $180,000 , of which one-half is fixed expense (inclusive of a $20,000 annual depreciation charge). Fixed expenses are incurred evenly during the year. The other selling and administrative expenses vary with sales. Expenses are paid during the month incurred.

Required:
a. Prepare a schedule of estimated cash collections for July.
b. Prepare a schedule of estimated July cash payments for purchases.
c. Prepare schedules of July selling and administrative expenses, separately identifying those requiring cash disbursements.

Answer 1

The Peoria Supply Company

a. Schedule of Estimated Cash Collections:

Cash collections: July

50% sales month $25,500

less 2% cash discount (510)

40% following month 16,800

8% second month 2,400

Total collections $44,190

b. A Schedule of Estimated July Cash Payments for Purchases

June July

Sales $42,000 $51,000

Ending inventory 18,000* 27,000

Beginning inventory 21,000 18,000*

Estimated Purchases 39,000 60,000

Payment for purchases:

50% purchase month $30,000

50% following month 19,500

Total payment for purchases $49,500

c. Selling and administrative expenses

Non-Cash expenses:

Depreciation expense $1,667

Cash disbursements:

Other fixed costs 5,333

Variable costs 6,375

Total costs $13,375

Step-by-step explanation:

a) Data and Calculations:

Selling price per product = $30

Purchase cost per product = $20

Total sales dollars for next year = $720,000

Month Sales Revenue

May $30,000

June 42,000

July 51,000

August 54,000

July 1:

Cash balance = $20,000

Merchandise inventory $18,000

Accounts receivable (sales) 23,000

Accounts payable (purchases) 12,000

Ending inventory = $27,000 ($54,000 * 50%)

Ending inventory = 50% of next month's budgeted sales

Selling and administrative expenses (excluding bad debts) for the year = $180,000

Fixed costs = $90,000

Depreciation 20,000

Cash fixed costs = $70,000

Monthly fixed costs = $5,833

Variable costs = $90,000

Variable costs per sales dollars = $90,000/$720,000 = $0.125

Cash variable cost for July $0.125 * $51,000 = $6,375

a. Schedule of Estimated Cash Collections:

Cash collections: May June July August

$30,000 $42,000 $51,000 $54,000

50% sales month 15,000 21,000 25,500 27,000

less 2% cash discount (300) (420) (510) (540)

40% following month 16,800 20,400

8% second month 2,400 3,360

2% Uncollectible