Chapter 8, Problem 13E

Schedules of Expected Cash Collections and Disbursements; Income Statement: Balance Sheet LOB-2. L08-4, LOB-9, LOB—10
Refer to the data for Beech Corporation in Exercise 8-12 .The Company is considering making the following changes to the assumptions underlying its master budget:
1. Each month’s credit sales are collected 45% in the month of sale and 55%in the month following the sale.
2. Each month’s ending inventory must equal 20% of the cost of nextmonth’s sales.
3. Thecompany pays for 30% of its merchandise purchases in the month of the purchase and the reaming 70% us the month following the purchase.
All other information from Exercise 8-12 that is not mentioned above remains the same.
Required:
Using the new assumptions described above, complete the following requirements:
1. Prepare a schedule of expected cash collections for July. August, and September, Also compute total cash collections for the quarter ended September 30.
2. a. Prepare a merchandise purchases budget for July. August, and September Also compute total merchandise purchases for the quarter ended September30.
b. Prepare a schedule of expected cash disbursements for merchandise purchases for July. August and September Also compute total cash disbursementsfor merchandise purchases for the quarter ended September 30.
3. Using Schedule 9 as your guide, prepare an income statement for the quarter ended September 30.
4. Prepare a balance sheet as of September 30.

To determine

the value of the collection in the month of July, August, September and October

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Total cash collection of the July August, September and December are $230,500, 219,000, 225,500 and $229,000.

Calculate the expected cash collection,

Particulars	July	August	September	October
Sales	210,000	230,000	220,000	240,000
Collection
45% in month of sales	94,500	103,500	99,000	108,000
55% in the month of following	0	115,500	126,500	121,000
Collection from account receivable	136,000	0	0	0
Total cash collection	230,500	219,000	225,500	229,000
Table (1)

a.

To determine

the value of the merchandise purchase for the quarter ended September

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Formula to calculate the merchandise purchase for the quarter ended September,

$\text{Marchandise}\text{purchases}=\left(\begin{array}{l}\text{Closing}\text{inventory}\text{of}\text{July}+\text{Closing}\text{inventory}\text{of}\text{August}\\ +\text{Closing}\text{inventory}\text{of}\text{September}\end{array}\right)$

Substitute, $27,600 for the closing inventory July, $26,400 for the closing inventory of August and $28,800 for the September

$\begin{array}{c}\text{Marchandise}\text{purchases}=\$27,600+\$26,400+\$28,800\\ =\$82,800\end{array}$

Working notes:

Calculation of merchandise purchase budget

Particulars	July	August	September	October
Sales	210,000	230,000	220,000	240,000
Cost of goods sold (60%)	126,000	138,000	132,000	144,000
Less: Opening inventory	62,000	27,600	26,400
Add: closing inventory(20% of the next month cost of goods sold)	27,600	26,400	28,800
Table (2)

To determine

The value of the merchandise purchases

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Formula to calculate total cash disbursement for merchandise purchase for the quarter ended September,

$\text{Cash disbursement}\text{marchandise}\text{purchases}=\left(\begin{array}{l}\text{Marchandise}\text{purchases}\text{for}\text{July}\\ +\text{Marchandise}\text{purchases}\text{for}\text{August}\\ +\text{Marchandise}\text{purchases}\text{for}\text{September}\end{array}\right)$

Substitute, $113,200 for merchandise purchase in month July, $117,200for merchandise purchase in month of August and $135,800 for merchandise purchase in month September

$\begin{array}{c}\text{Marchandise}\text{purchases}=\$113,200+\$117,200+\$135,800\\ =\$366,200\end{array}$

Working notes:

Particulars	July	August	September
Purchases	91,600	136,800	134,400
Cash payment (30%)	$27,480	$41,040	$40,320
70% on the following month	0	64,120	95,760
Payment of account payable in month of July	71,100	0	0
Total	98,580	105,160	136,080
Table (3)

Calculate the purchase in the month of July,

$\begin{array}{c}\text{Purchase}=\text{Cost}\text{of}\text{goods}\text{sold}+\text{Closing}\text{inventory}-\text{Opening}\text{Inventory}\\ =\text{\$126,000}+\$27,600-\$62,000\\ =\$91,600\end{array}$

Calculate the purchase in the month of August,

$\begin{array}{c}\text{Purchase}=\text{Cost}\text{of}\text{goods}\text{sold}+\text{Closing}\text{inventory}-\text{Opening}\text{Inventory}\\ =\text{\$138,000}+\$26,400-\$27,600\\ =\$136,800\end{array}$

Calculate the purchase in the month of September,

$\begin{array}{c}\text{Purchase}=\text{Cost}\text{of}\text{goods}\text{sold}+\text{Closing}\text{inventory}-\text{Opening}\text{Inventory}\\ =\$132,000+\$28,800-\$26,400\\ =\$134,400\end{array}$

To determine

To prepare: Income statement of the company

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Particulars	JulyAmount ($)	AugustAmount ($)	September Amount ($)
Sales	210,000	230,000	220,000
Cost of goods sold (60%)	126,000	138,000	132,000
Gross profit	84,000	92,000	88,000
Less: Selling & Administration expense	(60,000)	(60,000)	(60,000)
Less: Depreciation	(5,000)	(5,000)	(5,000)
Less: remaining expense	(55,000)	(55,000)	(55,000)
Net profit(loss)	(36,000)	(28,000)	(32,000)
Table (4)

To determine

To Prepare: Balance sheet of the company

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Balance sheetas on September 31
Assets:	Amount ($)
Cash	225,500
Account receivable	121,000
Inventory	62,000
Plant and equipment, net of depreciation	132,000
Total assets	540,500
Liability and stockholder’ equity
Account payable	209,600
Common stock	327,000
Retained earnings	3,900
Total liabilities and stockholder’s equity	563,500
Table (5)

Working notes:

Calculate the retained earnings,

$\begin{array}{c}\text{Retained}\text{earnings}=\left(\begin{array}{l}\text{Net}\text{Loss}\text{of}\text{July}+\text{Net}\text{Loss}\text{of}\text{August}\\ +\text{Net}\text{Loss}\text{of}\text{Sepember}+\text{Old}\text{retained}\text{earnings}\end{array}\right)\\ \text{=\$99,900}+\left(-\$36,000\right)+\left(-\$28,000\right)+\left(-\$32,000\right)\\ =\$3,900\end{array}$