Chapter 8, Problem 20P

Cash Budget; Income Statement: Balance Sheet; Changing Assumptions L08-2, L08-4, LOB-8, LOB-9, L08-10
Refer to the data for Minden Company in Problem 8-19. The company is considering making the following changes to the assumptions underlying its masterbudget:
1. Sales are budgeted for S220, 000 for May.
2. Each month’s credit sales are collected 60% in the month of sale and 40% in the month following the sale.
3. The company pays for 50% of its merchandise purchases in the month of the purchase and the remaining 50% in the month following the purchase.
All other information from Problem 8-19 that is not mentioned above remains the same.
Required:
Using the new assumptions described above, complete the following requirements:
1. Calculate the expected cash collections for May.
2. Calculate the expected cash disbursements for merchandise purchases for May.
3. Prepare a cash budget for May.
4. Using Schedule 9 as your guide, prepare a budgeted income statement for May.
5. Prepare a budgeted balance sheet as of May 31.

To determine

The expected cash collection for May

Introduction: Net sales means the revenue that a company generates from the sales after deducting the amount of sales allowance, sales returns, and sales discount

Explanation of Solution

M. company
Expected cash collection from sales
Particulars	Calculations	Amount($)
Cash sales of May		60,000
Collection of account receivable of April		54,000
Cash from may credit sale	$\left(\$160,000\times 60\%\right)$	96,000
Total cash receipts		210,000
Table (1)

Hence, $210,000 is the total receipts of sales.

To determine

Te expected cash disbursement for merchandise purchase

Introduction: Net sales means the revenue that a company generates from the sales after deducting the amount of sales allowance, sales returns, and sales discount

Explanation of Solution

M. company
Expected cash disbursements for merchandise purchases
Particulars	Calculations	Amount($)
Payment of Account payables balance as on April 30		63,000
Payment of May’s credit purchases	$\left(\$120,000\times 50\%\right)$	60,000
Total cash disbursements		123,000
Table (2)

Hence, $123,000 is the total cash disbursements.

To determine

To prepare: Cash budget for May

Introduction: Net sales means the revenue that a company generates from the sales after deducting the amount of sales allowance, sales returns, and sales discount

Explanation of Solution

M. company
Cash budget for the month of May
Particulars		Amount($)
Beginning cash balance		9,000
Add: Cash collection		210,000
Total cash Available	A	219,000
Less: Cash disbursements
For merchandise		123,000
For selling and administrative expenses		72,000
For equipment		6,500
Total cash disbursement	B	201,500
Excess (deficiency) of cash	$\left(\text{C}\right)=\left(\text{A}\right)-\left(\text{B}\right)$	17,500
Financing:
Borrowings	D	20,000
Repayments	E	(14,500)
Interest	F	(100)
Ending cash balance	$\text{C}+\text{D}+\text{E}+\text{F}$	22,900
Table (3)

Hence, the expected ending cash balance is $22,900.

To determine

To prepare: The income statement for May

Introduction: Net sales means the revenue that a company generates from the sales after deducting the amount of sales allowance, sales returns, and sales discount

Explanation of Solution

M. company
Budget income statement
For the month ended May 31
Particulars		Amount($)
Budgeted sales		220,000
Less: Cost of goods sold		110,000
Gross profit		110,000
Less:
Selling and administrative expenses		72,000
Depreciation		2,000
Interest		100
Net income		35,900
Table (4)

Working notes:

Calculate the amount of cost of goods sold,

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\left(\begin{array}{l}\text{Opening}\text{balance}\text{of}\text{inventory}+\text{Budgeted}\text{purchase}\\ -\text{Budgeted}\text{closing}\text{inventory}\end{array}\right)\\ =\$30,000+\$120,000-\$40,000\\ =\$110,000\end{array}$

Hence, the net income of the M. Company is $15,900.

To determine

To prepare: Balance sheet for May

Introduction: Net sales means the revenue that a company generates from the sales after deducting the amount of sales allowance, sales returns, and sales discount

Explanation of Solution

M. company
Balance sheetAs at May 31
Particulars	Calculations	Amount($)
Current assets
Cash		22,900
Account receivable	$\left(\$220,000-\$60,000\right)\times 40\%$	64,000
Inventory		40,000
Fixed Assets
Building and equipment	$\left(\$207,000+\$6,500-\$2,000\right)$	211,500
Total assets		338,400
Liability and stockholder’s equity
Stockholder’s equity
Capital stock		180,000
Retained earnings	$\left(\$42,500+35,900\right)$	78,400
Total stockholder’s equity		258,400
Accounts payable	$\left(\$120,000\times 50\%\right)$	60,000
Notes payable		20,000
Total liabilities and stockholders’ equity		338,400
Table (4)

Hence, the balance of the balance sheet is $338,400.