
a.
Prepare the
a.

Explanation of Solution
Budget:
Budget is an effective tool to achieve the financial and operational goals of the business. Budget is the key element of the financial planning and it assists managers to control the business costs. Management should set the budgeted amount at reasonable and achievable levels.
Prepare the budgeted income statement of Company R for the month May as follows:
Budgeted income statement of Company R for the month of May | |
Particulars | $ |
Budgeted sales | 72,000 |
Less: Cost of goods sold (2) | 43,200 |
Gross profit (1) | 28,800 |
Less: Operating , administrative and selling expense: | |
Variable selling & administrative costs (3) | 3,600 |
Fixed selling & administrative costs | 12,000 |
Budgeted pretax operating income | 13,200 |
Interest expense | 4,500 |
Pretax income | 8,700 |
Less: Income taxes (4) | 3,045 |
Budgeted net income | 5,655 |
Table (1)
Therefore, the budgeted net income of Company R for the month of May is $5,655.
Working note:
Calculate the amount of gross profit
Calculate the cost of goods sold
Calculate the variable selling, and administrative costs
Calculate the income tax expense
b.
Prepare the
b.

Explanation of Solution
Prepare the cash budget of Company R for the month May as follows:
Cash budget of Company R for the month of May | ||
Particulars | $ | $ |
Beginning cash, May 1 | 25,000 | |
Add: | ||
Collections on March sales (5) | 6,500 | |
Collections on April sales (6) | 25,200 | |
Collections on May sales (7) | 21,600 | 53,300 |
Total cash available | 78,300 | |
Less: | ||
Payments on April payables (8) | 4,800 | |
Payments on May payables (9) | 33,600 | |
Variable selling & administrative costs (3) | 3,600 | |
Fixed selling & administrative costs (10) | 8,000 | |
Debt service payments | 5,000 | 55,000 |
Ending cash, May 31 | 23,300 |
Table (2)
Therefore, the ending cash balance at the end of the May is $23,300.
Working note:
Calculate the cash received from the March sales
Calculate the cash received from the April sales
Calculate the cash received from the May sales
Calculate the cash paid for the merchandise purchase for the month April
Note: The purchase in the given month that are paid in the following month is 20%
Calculate the cash paid for the merchandise purchase for the month May
Calculate the fixed selling and administrative costs
c.
Explain the budgeted
c.

Explanation of Solution
Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.
Accrual accounting: The method of accounting which recognizes revenues before they are received, and recognizes expenses before they are paid, is referred to as accrual accounting.
Explain the budgeted cash flow of Company R in May differs from its budgeted net income as follows:
In the budgeted income statement, all the revenues and expenses are recorded under the accrual basis of accounting. Under accrual basis, the revenues are recognized even if the cash is not received, and expenses are incurred even if cash is not paid. Additionally, the non-cash (
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Chapter 23 Solutions
Financial & Managerial Accounting
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