Question

Sales are budgeted at $310,000 for November, $330,000 for December, and $320,000 for January. Collections are expected to be 80% in the month of sale and 20% in the month following the sale. The cost of goods sold is 70% of sales. The company desires an ending merchandise inventory equal to 75% of the cost of goods sold in the following month. Payment for merchandise is made in the month following the purchase. Other monthly expenses to be paid in cash are $21,900. Monthly depreciation is $21,700. Ignore taxes.

Balance Sheet
October 31
Assets
Cash $ 20,800
Accounts receivable (net of allowance for uncollectible accounts) 80,800
Merchandise Inventory 214,200
Property, plant and equipment (net of $648,000 accumulated depreciation) 1,170,000
Total assets $ 1,485,800
Liabilities and Stockholders’ Equity
Accounts payable $ 197,800
Common stock 710,000
Retained earnings 578,000
Total liabilities and stockholders’ equity $ 1,485,800
a. Prepare a Schedule of Expected Cash Collections for November and December.
b. Prepare a Merchandise Purchases Budget for November and December.

Answer 1

A.

Sales

November: $310,000

December: $330,000

Account Receivable

November: $80,800

December: -

Sales in November;

November: $248,000

December: $62,000

Sales in December

December: $264,000

Total:

November: $638,800

December: $656,000

B.

Cost of Goods Sold

November: $217,000

December: $231,000

Ending Merchandise Inventory

November: $173,250

December: $240,000

Total Needs

November: $390,250

December : $471,000

Beginning Merchandise Purchase

November: $162,750

December: $173,250

Required purchase

November: $227,250

December: $297,750

Step-by-step explanation:

A. Preparing a Schedule of Expected Cash Collections for November and December.

Here,only data relating to the months of November and December will be considered.

The following entries will be considered

1. Sales

2. Accounts Receivable

3. Sales in November

4. Sales in December

5. Total

The cash collection entry us as follows:

Sales

November: $310,000

December: $330,000

Account Receivable

November: $80,800 (Received from the month of October)

December: -----

Because collections are expected to be 80% in the month of sale....

Sales in November;

November: 80% * $310,000 = $248,000

...... and 20% in the month following the sale

December: 20% * $310,000 = $62,000

Sales in December

December: 80% * $330,000 = $264,000

Total:

Summing up all calculations tagged "November"

November: $310,000 + $80,800 + $248,000 = $638,800

Summing up all calculations tagged "December"

December = $330,000 + $62,000 + $264,000 = $656,000

B. Preparing a Merchandise Purchases Budget for November and December.

The following entries will be considered

1. Cost of Goods sold

2. Ending Merchandise Inventory

3. Total Needs

4. Beginning Merchandise Inventory

5. Required Purchase.

The entries are as follows:

Cost of Good = 70% * Sales

November: 70% * $310,000 = $217,000

December: 70% * $330,000 = $231,000

Ending Merchandise Inventory (ending merchandise inventory = 75% of the cost of goods sold in the following month)

November: 75% * Cost of goods in December = 75% * 231,000 = $173,250

December = 75% * Cost of goods in January = 75% * $320,000 = $240,000

Total Needs = Cosy of Goods Sold + Ending Merchandise Inventory

November = $217,000 + $173,250 = $390,250

December = $231,000 + $240,000 = $471,000

Beginning Merchandise Purchase = 75% * Cost of Goods Sold

November = 75% * $217,000 = $162,750

December = 75% * 231,000 = $173,250

Required purchase = Total Needs - Beginning merchandise inventory

November = $390,000 - $162,750 = $227,250

December = $471,000 - $173,250 = $297,750