Chapter 8, Problem 17E

Cash Flows; Budgeted Income Statement and Balance Sheet LO 8-2, LO 8-4, LO 8-4, LOB-9, L08-1O
Wheeling Company is a merchandiser that provided a balance sheet as of September 30 as shown below:

The company is in the process of preparing a budget for October and has assembled the following data:
1. Sales are budgeted at $240,000 for October and $250,000 for November. Of these sales, 35% will be for cash; the remainder will be credit sales. Fortypercent of a month’s credit sales are collected in the month the sales are made, and the remaining 60% is collected in the following month. Allof the September 30 accounts receivable will be collected in October.
2. The budgeted cost of goods sold is always 45% of sales and the ending merchandise inventory is always 30% of the following month’s cost of goods sold.
3. All merchandise purchases are on account. Thirty percent of all purchases are paid for in the month of purchase and 70% are paid for in the followingmonth. All of the September 30 accounts payable to suppliers will be paid during October.
4. Selling and administrative expenses for October are budgeted at $78,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation isbudgeted at $2,000 for the month.
Required:
Using the information provided, calculate or prepare the following:
a. The budgeted cash collections for October.
b. The budgeted merchandise purchases for October.
c. The budgeted cash disbursements for merchandise purchases for October.
d. The budgeted net operating income for October.
e. A budgeted balance sheet at October 31.
2. Assume the following changes to the underlying budgeting assumptions: (1) 50% of a month’s credit sales are collected in the month the sales are made and
the remaining 500 o is collected in the following month, (2) the ending merchandise inventory is always 10% of the following month’s cost of goods sold,and (3) 20% of all purchases are paid for in the month of purchase and S0°o aie paid for in the following month. Using these new assumptions, calculate orprepare the following:
a. The budgeted cash collections for October.
b. The budgeted merchandise purchases for October.
c. The budgeted cash disbursements for merchandise purchases for October.
d. Net operating income for the month of October.
e. A budgeted balance sheet at October 31.
3. Compare your answers in requirement 1 to those that you obtained in requirement 2. If ‘heeling Company is able to achieve the budgeted projectionsdescribed in requirement 2, will it improve the company’s financial performance relative to the projections that you derived in requirement 1?