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koel26
Nov 18, 2010, 10:41 PM
Weller Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store's operations follow:

• Sales are budgeted at $330,000 for November, $300,000 for December, and $320,000 for January.
• Collections are expected to be 85% in the month of sale, 14% in the month following the sale, and 1% uncollectible.
• The cost of goods sold is 60% of sales.
• The company purchases 80% of its merchandise in the month prior to the month of sale and 20% in the month of sale. Payment for merchandise is made in the month following the purchase.
• Other monthly expenses to be paid in cash are $21,200.
• Monthly depreciation is $21,000.
• Ignore taxes.

Statement of Financial Position
October 31
Assets:
Cash $ 22,000
Accounts receivable (net of allowance for uncollectible accounts) 83,000
Inventory 158,400
Property, plant and equipment (net of $594,000 accumulated depreciation) 1,004,000
Total assets $1,267,400

Liabilities and Stockholders' Equity:
Accounts payable $ 196,000
Common stock 620,000
Retained earnings 451,400
Total liabilities and stockholders' equity $1,267,400

Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.
b. Prepare a Merchandise Purchases Budget for November and December.
c. Prepare Cash Budgets for November and December.
d. Prepare Budgeted Income Statements for November and December.
e. Prepare a Budgeted Balance Sheet for the end of December.

Just Looking
Nov 18, 2010, 11:56 PM
Please read this notice. I won't give you the answers, but I'll tell you how to get started. You can come back with questions or to have your work checked, if you like.

https://www.askmehelpdesk.com/finance-accounting/announcement-font-color-ff0000-u-b-read-first-expectations-homework-help-board-b-u-font.html

I would do a simple spreadsheet for this, with columns by the months.

a. Expected cash collections - You are given sales in November and December. Per instructions 85% of sales are collected in the same month, so for example in November you will expect to collect 85% of the $330,000 budget. 14% are collected the following month, so 14% of the $330,000 will be collected in December, along with 85% of the December sales. Don't forget there are A/R on the books that will be collected in November.
b. With purchases, you know sales and you know COGS is 60% of sales. With that you can compute costs of goods sold for the month. From there, read the question to see how purchases are made - i.e. 80% in previous month. Remember your inventory at 10/31.
c. You have the info in (a) about how cash is received and in (b) with how it is paid for purchases. You just need to add other cash expenditures. Pay attention to when the question shows receipts and disbursments being paid, i.e. how account receivable and payable are collected or made.

Why don't you see if you can get this part and then if you want help, we'll go on with d and e? Just take it a step at a time.

koel26
Nov 19, 2010, 07:09 AM
Thank you so much for helping me understand the problem, I will work out and check the answers with u shortly.

koel26
Nov 19, 2010, 08:25 AM
I computed (a) Total cash coll. Nov:363,500 Dec:301200. Am I right? Qs. Is what happens to uncollectible? (b) Mer pur budget:sales+desired EI= total needs-BI=reqd. purchases. Pease helpme understand how to cmpute EI & BI. COGS198000(Nov), 180000(Dec)

Just Looking
Nov 19, 2010, 09:50 AM
Yes, that's what I see for cash. Uncollectibles are accounts receivable that are not expected to be paid. Since there will be no cash coming in, they do not affect your cash flow. They are treated as a contra-account receivable, meaning they are subtracted from accounts receivable on the balance sheet, with the other side of that entry being a bad debt expense on the income statement. You will deal with them when you do your statements as part of questions (d) and (e).

You have the correct amounts for COGS in November and December. The question now is how are these purchased. Per the question, the company purchases 80% in the month prior to sales. If you look at November's COGS amount, you would expect that 80% of those costs are purchased in October. Look at your beginning inventory amount (the EI for October). The other 20% are purchased in November. Finally, 80% of December's costs are purchased in November (i.e. the ending inventory required at November). What are your purchase requirements for November, considering what is needed for November and December? Since the beginning inventory at November has already been purchased, it is not part of the November requirements.

P.S. - Instead of using the comment box to respond, there is an answer box at the bottom of the page. You can type a lot more text into it. With the comment box, you are limited and your text might get cut off.

koel26
Nov 19, 2010, 06:05 PM
Hello,

Can you please confirm that the following is correct:
__________________________________________________ ________

Merchandise Purchases Budget

Nov Dec Jan

Budgeted Sales 330000 300000 320000
Add desired EI 183600 189600
Total needs 513600 489600
Less BI 158400 183600
Required Purchases 355200 306000

183600= 20%NOV(39600) + 80%DEC(144000)
189600= 20%DEC(36000) + 80% JAN(153600)

Cost of Goods sold 198000(.6X330000) 180000(.6X300000) 192000(.6X 320000)
___________________

Cash Budget
NOV DEC

Cash Beg Bal 22000 30300
Add receipts:
Cash collections 363500 301200
Total Cash available 385500 331500
Less disbursements 355200 306000
30300 25500
__________________________________________________ _

Sincerely,
IH

Just Looking
Nov 19, 2010, 06:45 PM
You are confusing your sales price with your purchases price. The sales price was used to figure out how much cash you would have coming in. To compute the cash going out for purchases, you have to look at what you pay for the purchases.

For example, if you are going to sell $330,000 and your COGS is 60% of that, you COGS is $198,000. COGS means cost of goods sold - that is the cost (in merchandising, the purchase price) of the items that were sold. So, if you sold $330,000 and had a COGS of $198,000, your gross profit is $132,000. From this you would deduct your overhead to get to net income.

In figuring out your purchases, you only look at the cost of the goods. You know that 80% comes from the previous month. 80% of 198,000 = $158,400. As you can see, that is the amount you have in inventory at the end of October. You won't need to purchase that amount in November. You do need to purchase 20% of $198,000 or $39,600, and 80% of the following months COGS (the $144,000) figure. Your computation of $183,600 for purchases in November is correct. Your total needs for Nov should be $198,000 + $144,000 = $342,000. Your required purchases are $342,000 - $158,400 (beg inv) = $183600.

When you are doing your cash budget, for November you have the cash collections right. The problem also states that payment for merchandise is made in the month following the purchase. The disbursements are only the accounts payable from October, and you need to deduct the monthly expense in cash of $21,200 that is in the original question. The purchases in November are in accounts payable at the end of November and paid for in December. I think it would be a lot easier for you to see this if you put it in a spreadsheet.

WSSURAMS2
Apr 12, 2012, 10:06 AM
How do you do parts d and e?