Chapter 13, Problem 54P

Budgeted Purchases and Cash Flows

Mast Corporation seeks your assistance in developing cash and other budget information for May, June, and July. At April 30, the company had cash of $11,000, accounts receivable of $874,000, inventories of $618,800, and accounts payable of $266,110. The budget is to be based on the following assumptions.

• Each month’s sales are billed on the last day of the month.
• Customers are allowed a 2 percent discount if payment is made within 10 days after the billing date. Receivables are recorded in the accounts at their gross amounts (not net of discounts).
• The billings are collected as follows: 70 percent within the discount period, 15 percent by the end of the month, and 12 percent by the end of the following month. Three percent is uncollectible.

Purchase data are as follows:

• Of all purchases of merchandise and selling, general, and administrative expenses, 60 percent is paid in the month purchased and the remainder in the following month.
• The number of units in each month’s ending inventory equals 120 percent of the next month’s units of sales.
• The cost of each unit of inventory is $10.
• Selling, general, and administrative expenses, of which $4,000 is depreciation, equal 15 percent of the current month’s sales.
• Actual and projected sales follow:

Required

Compute the following:

1. a.      Budgeted purchases in dollars for May.
2. b.      Budgeted purchases in dollars for June.
3. c.       Budgeted cash collections during May.
4. d.      Budgeted cash disbursements during June.
5. e.       The budgeted number of units of inventory to be purchased during July.

To determine

Calculate the Budgeted purchases in dollars for May.

Answer to Problem 54P

The budgeted purchase for May is $113,000.

Explanation of Solution

Budgeted purchase:

The budgeted purchase is the total amount of goods purchased in the budgeted to attain the targeted or estimated sales.

Calculate the budgeted purchase for May ($):

$\begin{array}{c}\text{Budgeted purchase (\$) = Budgeted purchase (unit) }\times \text{ Purchase price per unit}\\ \text{= 11,300 (3) }\times \text{ \$10}\\ \text{= \$113,000}\end{array}$

Thus, the budgeted purchase for May is $113,000.

Working note 1:

Calculate the closing stock:

$\begin{array}{c}\text{Closing stock = June sale }\times \text{ (\% increase)}\\ \text{ = 11,400 }\times \text{ 120\%}\\ \text{= 13,680 }\end{array}$

Working note 2:

Calculate the opening stock:

$\begin{array}{c}\text{Opening stock = May sale }\times \text{ (\% increase)}\\ \text{ = 11,900 }\times \text{ 120\%}\\ \text{= 14,280 }\end{array}$

Working note 3:

Calculate the budgeted purchase for May (units):

$\begin{array}{c}\text{Budgeted purchase = Sales + Closing stock (1) - Opening stock (2)}\\ \text{= 11,900 + 13,680 - 14,280}\\ \text{= 11,300}\end{array}$

To determine

Calculate the Budgeted purchases in dollars for June.

Answer to Problem 54P

The budgeted purchase for June is $121,200.

Explanation of Solution

Budgeted purchase:

The budgeted purchase is the total amount of goods purchased in the budgeted to attain the targeted or estimated sales.

Calculate the budgeted purchase for June ($):

$\begin{array}{c}\text{Budgeted purchase (\$) = Budgeted purchase (unit) }\times \text{ Purchase price per unit}\\ \text{= 12,120 (6) }\times \text{ \$10}\\ \text{= \$121,200}\end{array}$

Thus, the budgeted purchase for May is $121,200.

Working note 4:

Calculate the closing stock:

$\begin{array}{c}\text{Closing stock = July sale }\times \text{ (\% increase)}\\ \text{ = 12,000 }\times \text{ 120\%}\\ \text{= 14,400 }\end{array}$

Working note 5:

Calculate the opening stock:

$\begin{array}{c}\text{Opening stock = June sale }\times \text{ (\% increase)}\\ \text{ = 11,400 }\times \text{ 120\%}\\ \text{= 13,680 }\end{array}$

Working note 6:

Calculate the budgeted purchase for May (units):

$\begin{array}{c}\text{Budgeted purchase = Sales + Closing stock (4) - Opening stock (5)}\\ \text{= 11,400 + 14,400 - 13,680}\\ \text{= 12,120}\end{array}$

To determine

Calculate the Budgeted cash collection during May.

Answer to Problem 54P

The budgeted cash collection during May is $691,896.

Explanation of Solution

Budgeted cash collection:

Budgeted cash collection is the amount of total cash inflow in the budgeted period. Only the cash revenues and incomes are considered in the calculation.

Calculate the budgeted cash collection:

Cash collection will be made for April (70% and 15%) and May (12%) because sales of each month are billed on the last day of the month.

The billings have been collected as follows: 70 percent within the discount period (April), 15 percent by the end of the month (April), and 12 percent by the end of the following month (May). Three percent is uncollectible.

Customers are allowed a discount of 2% for making the payment within 10 after the billing date.

Particulars	Sales	70% (a)	15%	12%	2% discount    $\left(a\times 2\%\right)$	Total cash collection
April	$726,000	$508,200	-	-	$10,164	$498,036
April	$726,000	-	$108,900	-	-	$108,900
May	$708,000	-	-	$84,960	-	$84,960
Total cash collection						$691,896

Table: (1)

Thus, the total cash collection for May is $691,896.

To determine

Calculate the Budgeted cash disbursement during June.

Answer to Problem 54P

The budgeted cash disbursement during June is $218,320.

Explanation of Solution

Budgeted cash disbursement:

Budgeted cash disbursement is the amount of total cash outflow in the budgeted period. Only the cash expenses are considered in the calculation.

Calculate the budgeted cash disbursement for June:

Calculate the selling general and administrative expenses:

May:

$\begin{array}{c}\text{May's expense = [may's sales }\times \text{ (\% of cash collection) - depreciation] }\times \text{ 40\%}\\ \text{= [(\$714,000 }\times \text{ 15\%) - \$4,000 ] }\times \text{ 40\%}\\ \text{= \$41,240}\end{array}$

June:

$\begin{array}{c}\text{June's expense = [June's sales }\times \text{ (\% of cash collection) - depreciation] }\times \text{ 60\%}\\ \text{= [(\$684,000 }\times \text{ 15\%) - \$4,000 ] }\times \text{ 60\%}\\ \text{= \$59,160}\end{array}$

Calculate the purchase payment:

May:

$\begin{array}{c}\text{May's purchase = may's budgeted pruchase }\times \text{ 40\%}\\ \text{= \$113,000 }\times \text{ 40\%}\\ \text{= \$45,200}\end{array}$

June:

$\begin{array}{c}\text{June's purchase = June's budgeted pruchase }\times \text{ 60\%}\\ \text{= \$121,200 }\times \text{ 60\%}\\ \text{= \$72,720}\end{array}$

Thus, the total cash disbursement for June is $218,320$\left(\$41,240+\$59,160+\$45,200+\$72,720\right)$.

To determine

Calculate the Budgeted number of units of inventory to be purchased during July.

Answer to Problem 54P

The budgeted purchase for July is 12,240.

Explanation of Solution

Budgeted purchase:

The budgeted purchase is the total amount of goods purchased in the budgeted to attain the targeted or estimated sales

Calculate the budgeted purchase for July (units):

$\begin{array}{c}\text{Budgeted purchase = Sales + Closing stock (7) - Opening stock (8)}\\ \text{= 12,000 + 14,640 - 14,400}\\ \text{= 12,240 units}\end{array}$

Thus, the budgeted purchase for July is 12,240.

Working note 7:

Calculate the closing stock:

$\begin{array}{c}\text{Closing stock = August sale }\times \text{ (\% increase)}\\ \text{ = 12,200 }\times \text{ 120\%}\\ \text{= 14,640 }\end{array}$

Working note 8:

Calculate the opening stock:

$\begin{array}{c}\text{Opening stock = July sale }\times \text{ (\% increase)}\\ \text{ = 12,000 }\times \text{ 120\%}\\ \text{= 14,400 }\end{array}$