Chapter 22, Problem 25E

To determine

Prepare a budgeted income statement for the month of July and a budgeted balance sheet for July 31.

Explanation of Solution

Budgeted Income Statement

The statement that indicates the expected profitability of operations for the budget period is known as the budgeted income statement. It also provides the basis for evaluating the performance of a company, and act as a call to action.

Prepare a budgeted income statement for the month of July.

Company A
Budgeted Income Statement
For Month Ended July 31
Particulars	Amount	Amount
Sales		1,400,000
Less: Cost of goods sold		770,000
Gross profit		630,000
Less: Operating expenses
Salaries expense	285,000
Depreciation expense	36,000
Other cash expenses	200,000
Bank loan interest expense	6,600
Total expenses		527,600
Income before taxes		102,400
Less: Income tax expense		30,720
Net income		71,680

Table (1)

Working note:

Calculate cost of goods sold.

Particulars	Amount
Sales	$1,400,000
Cost percent	$\times$ 55%
Cost of goods sold	$770,000

Table (2)

Calculate salaries expense.

Particulars	Amount
Cash paid	$275,000
Less: Beginning payable	-50,000
Add: Ending payable	60,000
Salaries expense	$285,000

Table (3)

Calculate income tax expense.

Particulars	Amount
Pre-tax income	$102,400
Tax rate	$\times$30%
Income tax expense	$30,720

Table (4)

Prepare a budgeted balance sheet for July 31.

Company A
Budgeted Balance Sheet
As of July 31
Assets
Cash		122,400
Accounts receivable		1,220,000
Inventory		60,000
Total current assets		1,402,400
Equipment	1,600,000
Less: Accumulated depreciation	316,000	1,284,000
Total assets		2,686,400
Liabilities and Equity
Liabilities
Accounts payable	300,000
Salaries payable	60,000
Income taxes payable	30,720
Total current liabilities	390,720
Bank loan payable	660,000	1,050,720
Stockholders’ equity
Common stock	600,000
Retained earnings	1,035,680	1,635,680
Total liabilities and equity		2,686,400

Table (5)

Working note:

Calculate cost of goods sold.

Particulars	Amount
June sales (20% $\times$ $1,200,000)	$240,000
July sales   (70% $\times$ $1,400,000)	980,000
Cost of goods sold	$1,220,000

Table (6)

Calculate accumulated depreciation.

Particulars	Amount
Beginning Accumulated depreciation	$280,000
Add: Depreciation Expense	36,000
Ending Accumulated depreciation	$316,000

Table (7)

Calculate accounts payable.

Particulars	Amount
Purchases	$750,000
Percent unpaid	$\times$40%
Accounts payable balance	$300,000

Table (8)

Calculate ending retained earnings.

Particulars	Amount
Beginning retained earnings	$964,000
Net income	71,680
Ending retained earnings	$1,035,680

Table (9)

Determine cash balance as of July 31 using cash budget.

Company A
Cash Budget
For Month Ended July 31
Beginning cash balance	$50,000
Cash receipts from sales	1,364,000
Total cash available		$1,414,000
Cash disbursements:
Payments for merchandise	730,000
Salaries	275,000
Other expenses	200,000
Accrued taxes	80,000
Interest on bank loan	6,600
Total cash disbursements		(1,291,600)
Ending cash balance		$122,400

Table (10)

Working note for cash budget: Compute the cash receipts in the month of July.

Particulars	Amount ($)
From May sales $\left(\$1,720,000\times 20\%\right)$	$344,000
From June sales $\left(\$1,200,000\times 50\%\right)$	600,000
From July sales $\left(\$1,400,000\times 30\%\right)$	420,000
Total cash receipts	$1,364,000

Table (11)

Working note for cash budget: Compute the cash disbursement in the month of July.

For June purchases $\left(\$700,000\times 40\%\right)$	$280,000
For July purchases $\left(\$750,000\times 60\%\right)$	450,000
Total cash disbursement	$730,000

Table (12)