Master Budget: Operational and Financial Budgets

Key Lecture Concepts

1. PURPOSES OF BUDGETING SYSTEMS

 A budget is a detailed plan, expressed in quantitative terms, that
specifies how resources will be acquired and used during a given
period of time.
 Budget functions:
 Planning
 Communicating and coordinating the plans and views of numerous managers
within an organization.
 Allocating limited resources among various programs/projects.
 Controlling operations by serving as a standard against which actual results can
be compared.
 Evaluating performance
2. TYPES OF BUDGETS
 Master budget—a comprehensive profit plan that covers all phases of an
organization’s operations.
 Pro-forma (budgeted) financial statements
 Capital budget—focuses on the acquisition of long-term assets.
 Rolling budgets—continuously updated by adding a new time period (e.g., a
month) and dropping the period just completed.

3. ASSEMBLING THE MASTER BUDGET

 The master budget is a comprehensive planning tool for an
organization’s operations during a specific time period (usually a year).
 The master budget begins with a sales forecast. Items to consider in
deriving a sales forecast include:
 Past sales levels and trends
 General economic conditions
 Industry trends
 Other factors that may affect industry sales (e.g., technological change)
 Political and legal events
 Company pricing policies
 Advertising and product promotions
 Actions of competitors
 New products
 Market research studies
 Operational budgets, which focus on the operations needed to meet demand
for goods and services, vary from firm to firm. Budgets that fall in this
category for manufacturers, merchandisers, and/or service providers are
wide-ranging and often include those prepared for merchandise purchases,
labor costs, selling expenses, and overhead.
 Budgets are prepared for a host of different items including production, materials
acquisitions, labor use, overhead incurrence, selling and administrative expenses,
cash flows, and projected financial statements.
 Budget flows begin with sales, move to production, next move to production
elements (such as materials, labor, and overhead), and eventually culminate in
pro-forma financial statements.
4. FINANCIAL PLANNING MODELS
 Financial planning models assist in the budgeting process. These are sets of
mathematical relationships that express interactions among a firm’s
operational, financial, and environmental events.
 Computerized models can be run many times to explore various what-if
 scenarios, say, the impact on bottom-line profitability of changes in budget
variables (e.g., interest rates, demand, inflation rates, and competitors’
actions).

5. BUDGET ADMINISTRATION
 Many companies use a senior-level, executive advisory group (i.e., a
budget committee) to provide insights to the firm’s budget director.
 The budget director, often the controller, has direct responsibility for
construction of an entity’s budget document as well as determination of the
accompanying procedures (deadlines, information formats, responsible
parties, and so forth).
 Final budget approval usually rests with the firm’s board of directors or in the
case of a nonprofit organization, the board of trustees.
 Numerous companies have turned to e-budgeting, with employees
throughout an organization submitting and retrieving budget information via
the Internet. (The "e" stands for both electronic and enterprise-wide.)
 E-budgeting streamlines the budget process, reducing the time
spent on compiling and verifying data submitted from multiple
sources on (often) hundreds of spreadsheets and in multiple
formats.
 Some organizations use a zero-base budgeting approach, which is essentially
a start-from-scratch method. To receive funding for an upcoming period, each
activity must be justified in terms of its ongoing usefulness to the
organization.
 Other organizations use a base-budgeting approach whereby an
initial base package is given to a unit. This package would
include minimal funding, below which the unit would not be a
viable entity.
 Managers may request excess funding (i.e., an
incremental package) for those activities where the
benefits exceed the costs.
 Firms with international operations face added complexities in the
process of budget preparation.
 Foreign currencies must be translated into U.S. dollars.
 Inflation rates in foreign countries may be extremely high
and/or unpredictable.
 Foreign economies may be influenced by fluctuations in
consumer demand, availability of skilled labor, laws that affect
business commerce, and other similar factors.

6. BUDGETING PRODUCT LIFE-CYCLE COSTS

 Product life-cycle costs encompass the following phases: product planning
and concept design, preliminary design, detailed design and testing,
production, and distribution and customer service.
 In many cases, most of a product’s costs are committed rather early in the
item’s life cycle. It is therefore essential to budget total costs as early as
possible—most definitely, prior to the product being introduced in the
marketplace.
 Pre-marketplace planning is especially crucial for firms that have
very short product life cycles, as such organizations have little
time to adjust pricing strategies and production methods to
ensure that profitability is achieved.

7. BEHAVIORAL IMPACT OF BUDGETS

  Participative budgeting involves employee participation in the budget-
preparation process at various levels of the organizational hierarchy.
 Participation increases employees’ sense of ownership over the budget
document and the motivation to meet it. Too much participation, though, can
delay the process and raise costs.
 When budget information comes from many employees, upper
management should be aware of the tendency to pad the budget.
 For example, if asked to submit a sales budget, the sales manager may give a
lower figure than he or she really expects. This procedure is followed so if
sales come in higher than the given number, the sales force will look
productive.
 Underestimating sales and overestimating expenses are examples of padding,
and the difference between the padded amount and the realistic amount is
called budgetary slack.
 To avoid this behavior, management should educate
employees that budgets will not be used for witch-hunts
when figures are not met. Decreasing employee
uncertainty about how budgets will be used decreases the
tendency to build in a buffer or pad.

Note: Problems I – XI: Lecture Problems; Problems XII – XVII – with solutions)
I – Sales and Manufacturing Budgets
Scarborough Corporation manufactures and sells two products. Thingone and Thingtwo. In July 20x8,
Scarborough’s Budget Department gathered the following data in order to project the sales and budget
requirements for 20x9:

Projected Sales
Product Units Price
Thingone 60,000 P 70
Thingtwo 40,000 100

Inventories (in units):

Expected Desired
Product January 1, 20x9 December 31, 20x9
Thingone 20,000 25,000
Thingtwo 8,000 9,000

To produce one unit of Thingone and Thingtwo, the following raw materials are used:

Amount Used per Unit

Raw Material Thingone Thingtwo
A 4 lbs. 5 lbs.
B 2 lbs. 3 lbs.
C - 1 unit
Projected data for 20x9 with respect to raw materials are as follows:
Anticipated Expected Desired
Purchase Inventories Inventories
Raw Material Price January 1, 20x9 December 31, 20x9
A P8 32,000 lbs. 36,000 lbs
B 5 29,000 lbs 32,000 lbs
C 3 6,000 units 7,000 units
Projected direct labor requirements and rates for 20x9 are as follows:
Product Hours per Unit Rate per Hour
Thingone 2 P8
Thingtwo 3 9

Factory overhead is applied at the rate of P2 per direct labor hour.

Required: based on the production and budget requirements for 20x9 for Thingone and Thingtwo, prepare the
following 20x9 budgets:
1. Sales budget
2. Production budget
3. Raw materials purchases budget
 4. Direct labor budget
5. Budgeted finished goods inventory at December 31, 20x9.

II - (Ga37-39)
Home Company will open a new store on January 1. Based on experience from its other retail outlets, Home
Company is making the following sales projections:
Cash Sales Credit Sales
January......................... P60,000 P40,000
February....................... 30,000 50,000
March........................... 40,000 60,000
April............................. 40,000 80,000
Home Company estimates that 70% of the credit sales will be collected in the month following the month of
sale, with the balance collected in the second month following the month of sale.
Required:
1. Based on these data, the balance in accounts receivable on January 31 will be:
2. The March 31 balance in accounts receivable will be:
3. In a cash budget for the month of April, the total cash receipts will be:
III - (Ga45-46)
Sarter Corporation is in the process of preparing its annual budget. The following beginning and ending
inventory levels are planned for the year.
Beginning Inventory Ending Inventory
Finished goods (units)....................... 70,000 20,000
Raw material (grams)........................ 50,000 60,000
Each unit of finished goods requires 3 grams of raw material.
Required:
1. If the company plans to sell 880,000 units during the year, the number of units it would have to
manufacture during the year would be:
2. How much of the raw material should the company purchase during the year?
IV – (Ga52-53)
Marty's Merchandise has budgeted sales as follows for the second quarter of the year:
April P30,000
May 60,000
June 50,000
Cost of goods sold is equal to 70% of sales. The company wants to maintain a monthly ending inventory equal to
120% of the cost of goods sold for the following month. The inventory on March 31 was below this target and
was only P22,000. The company is now preparing a Merchandise Purchases Budget for April, May, and June.
Required:
1. The desired beginning inventory for June is:
2. The budgeted purchases for May are:
V – (Ga56-57)
Hamway Products, Inc. makes and sells a single product called a Wob. It takes two yards of material A to make
one Wob. Budgeted production of Wobs for the next four months is as follows:
April...................... 12,000 units
May....................... 13,500 units
June....................... 12,400 units
July........................ 11,200 units
The company wants to maintain monthly ending inventories of material A equal to 10% of the following month's
production needs. On March 31 this target had not been met since only 1,500 yards of material A were on hand.
The cost of material A is P.90 per yard.
Required:
1. The total cost of material A to be purchased in April is:
2. The desired ending inventory of material A for the month of June is
VI – (Ga54-55)
Harris, Inc., has budgeted sales in units for the next five months as follows:
June 9,400 units
July 7,800 units
August 7,300 units
September 5,400 units
October 4,100 units
Past experience has shown that the ending inventory for each month should be equal to 20% of the next month's
sales in units. The inventory on May 31 contained 1,880 units. The company needs to prepare a production
budget for the next five months.
Required:
1.The beginning inventory for September should be:
 2.The total number of units produced in July should be:
VII – (Ga47-49)
The following are budgeted data for the Bingham Company, a merchandising company:
Budgeted Sales (at retail)
January......................... P300,000
February....................... 340,000
March........................... 400,000
April............................. 350,000
Cost of goods sold as a percentage of sales is 60%. The desired ending inventory is 75% of next month's sales.
Required:
1. Assuming that the Bingham Company had inventory on hand of P70,000 (at cost) on January 1, the
purchases for January (at cost) would be:
2. The desired ending inventory (at cost) for the month of February would be:
3. Assume that all purchases are paid for in the month following the month of purchase. The cash
disbursements for purchases that would appear in the April cash budget would be:
VIII – (Lo6-7)
Webster Company has the following sales budget.
January P200,000
February 240,000
March 300,000
April 360,000
Cost of sales is 70% of sales. Sales are collected 40% in the month of sale and 60% in the following month.
Webster keeps inventory equal to double the coming month's budgeted sales requirements. It pays for purchases
80% in the month of purchase and 20% in the month after purchase. Inventory at the beginning of January is
P190,000. Webster has monthly fixed costs of P30,000 including P6,000 depreciation. Fixed costs requiring
cash are paid as incurred.
Required:
1. Compute budgeted cash receipts in March.
2. Compute budgeted accounts receivable at the end of March.
3. Compute budgeted inventory at the end of February.
4. Compute budgeted purchases in February.
5. March purchases are P290,000. Compute budgeted cash payments in March to suppliers of goods.
6. Compute budgeted accounts payable for goods at the end of February.
7. Cash at the end of February is P45,000. Cash disbursements are not required for anything other than
payments to suppliers and fixed costs. Compute the budgeted cash balance at the end of March assuming the
same information in No. 5 for March purchases.

IX - Budgeted Income Statement and Balance Sheet (Ga84-92)

Dilbert Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow:
 Sales are budgeted at P260,000 for November, P230,000 for December, and P210,000 for
January.
 Collections are expected to be 80% in the month of sale, 19% in the month following the
sale, and 1% uncollectible.
 The cost of goods sold is 65% of sales.
 The company purchases 60% of its merchandise in the month prior to the month of sale
and 40% 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 P20,300.
 Monthly depreciation is P20,000.
 Ignore taxes.

Statement of Financial Position

October 31
Assets
Cash................................................................................................................ P    27,000
Accounts receivable
(net of allowance for uncollectible accounts)............................................. 79,000
Inventory......................................................................................................... 101,400
Property, plant and equipment
(net of P574,000 accumulated depreciation)..............................................  1,082,000
Total assets...................................................................................................... P1,289,400

Liabilities and Stockholders’ Equity

Accounts payable............................................................................................ P   169,000
Common stock................................................................................................ 740,000
Retained earnings............................................................................................      380,400
Total liabilities and stockholders’ equity........................................................ P1,289,400
Required: Compute -
1. Expected cash collections in December are:
2. The cost of December merchandise purchases would be:
3. December cash disbursements for merchandise purchases would be:
4. The excess (deficiency) of cash available over disbursements for December would be:
5. The net income for December would be:
6. The cash balance at the end of December would be:
7. The accounts receivable balance, net of uncollectible accounts, at the end of December would be:
8. Accounts payable at the end of December would be:
9. Retained earnings at the end of December would be:

X – (Ga75-77)
Sipan Retail Company was recently created with a beginning cash balance of P12,000. The owner expects the
following for the first month of operations:
Cash sales to customers................................................................ P 8,000
Sales on account to customers...................................................... 30,000
Cash collected from account customers........................................ 12,000
Cost of merchandise purchased.................................................... 35,000
Cash paid for merchandise purchased.......................................... 24,500
Cost of merchandise sold.............................................................. 26,600
Cash paid for display cases........................................................... 9,600
Selling and administrative expenses............................................. 4,000
The display cases above were purchased at the beginning of the month and are being depreciated at a rate of
P200 per month. This amount is included in the selling and administrative expenses figure above. All other
selling and administrative expenses are paid as incurred. Sipan wants to maintain a cash balance of P10,000. Any
amount below this can be borrowed from a local bank as needed in increments of P1,000. All borrowings are
made at month end.

Required:
1. In Sipan's cash budget for this first month, how much money will Sipan need to borrow at month end?
2. In Sipan's budgeted income statement for this first month, what will net income (loss) be for this first
month?
3. In Sipan's budgeted balance sheet at the end of this first month, at what amount will accounts receivable
be shown?

XI – (Ga65-68)
The Panza Company makes and sells only one product called a Deb. The company is in the process of preparing
its Selling and Administrative Expense Budget for next year. The following budget data are available:
Monthly Variable Cost
Fixed Cost Per Deb Sold
Sales commissions.................................................. P0.75
Shipping.................................................................. 1.30
Advertising.............................................................. P30,000 0.20
Executive salaries.................................................... P25,000
Depreciation on office equipment........................... P15,000
Other........................................................................ P 7,000

All of these expenses (except depreciation) are paid in cash in the month they are incurred.

Required:
1.If the company has budgeted to sell 18,000 Debs in January, then the total budgeted variable selling and
administrative expenses for January will be:
2.If the company has budgeted to sell 16,000 Debs in February, then the total budgeted fixed selling and
administrative expenses for February is:
3.If the company has budgeted to sell 20,000 Debs in March, then the total budgeted selling and
administrative expenses per unit sold for March is:
4.If the budgeted cash disbursements for selling and administrative expenses for April total P116,000, then
how many Debs does the company plan to sell in April?

XII – with Solution/Answers

Mate Boomerang Corporation manufactures and sells plastic boomerangs. Expected
boomerang sales (in units) for the upcoming months are as follows:

July Aug. Sept. Oct. Nov. Dec.

12,00 15,00 8,00 11,000
Expected unit sales......... 0 0 10,000 0 7,000
Seven ounces of plastic resin are needed to produce every boomerang. Mate likes to have
enough plastic resin on hand at the end of the month to cover 25% of the next month's
production requirements. Mate also likes to maintain a finished goods inventory equal to 10%
of the next month's estimated sales.
Required:
How many ounces of plastic resin should Mate plan on purchasing during the month of
October?
Answer:
October production = 8,000 + (7,000 × 10%) - (8,000 × 10%) = 7,900;
November production = 7,000 + (11,000 × 10%) - (7,000 × 10%) = 7,400;
October production resin needs = 7,900 × 7 = 55,300 ounces
November production resin needs = 7,400 × 7 = 51,800 ounces
October resin purchases = 55,300 + (51,800 × 25%) - (55,300 × 25%)
= 54,425 ounces

XIII – with Solution/Answers

All sales at Meeks Company, a wholesaler, are made on credit. Experience has shown that
70% of the accounts receivable are collected in the month of the sale, 26% are collected in the
month following the sale, and the remaining 4% are uncollectible. Actual sales for March and
budgeted sales for the following four months are given below:

March (actual sales)........... $200,000

April................................... $300,000
May.................................... $500,000
June.................................... $700,000
July..................................... $400,000
The company's cost of goods sold is equal to 60% of sales. All purchases of inventory are
made on credit. Meeks Company pays for one half of a month's purchases in the month of
purchase, and the other half in the month following purchase. The company requires that end-
of-month inventories be equal to 25% of the cost of goods sold for the next month.
Required:
a. Compute the amount of cash, in total, which the company can expect to collect in
May.
b. Compute the budgeted dollar amount of inventory which the company should have
on hand at the end of April.
c. Compute the amount of inventory that the company should purchase during the
months of May and June.
d. Compute the amount of cash payments that will be made to suppliers during June
for purchases of inventory.
Answer:
a. Sales, April: $300,000 × 0.26........... $  78,000
Sales, May: $500,000 × 0.70............
.......................................................   350,000
Total Collections............................... $428,000

b. Budgeted cost of goods sold for May:

$500,000 × 60% = $300,000

Required inventory level at the end of April:

$300,000 × 25% = $75,000
c. May June July
$500,00
Budgeted sales......................................... 0 $700,000 $400,000
Budgeted cost of goods sold (60%)........ 300,000 420,000 240,000
  105,00
Desired ending inventory, at cost*.......... 0     60,000
 Total needs............................................... 405,000 480,000
    75,00
Less beginning inventory, at cost**........ 0   105,000
$330,00
Required purchases, at cost..................... 0 $375,000

*Following month’s cost of goods sold × 25%

**Current month’s cost of goods sold × 25%

d. Payments for May purchases: $330,000 × 0.50........ $165,000

Payments for June purchases: $375,000 × 0.50........   187,500
$352,500

XIII – with Solution/Answers

The following information is budgeted for McCracken Plumbing Supply Company for next
quarter:

April May June

$130,00
Sales........................................................... $110,000 0 $180,000
Merchandise purchases.............................. $85,000 $92,000 $105,000
Selling and administrative expenses.......... $50,000 $50,000 $50,000

All sales at McCracken are on credit. Forty percent are collected in the month of sale, 58% in
the month following the sale, and the remaining 2% are uncollectible. Merchandise purchases
are paid in full the month following the month of purchase. The selling and administrative
expenses above include $8,000 of depreciation on display fixtures and warehouse equipment.
All other selling and administrative expenses are paid as incurred. McCracken wants to
maintain a cash balance of $15,000. Any amount below this can be borrowed from a local
bank as needed in increments of $1,000. All borrowings are made at month end.

Required: Prepare McCracken's cash budget for the month of May. Use good form.
McCracken expects to have $24,000 of cash on hand at the beginning of May.

Answer:
McCracken Plumbing Supply
Cash Budget for the Month of May

Cash balance, beginning.................................................. $ 24,000

Add receipts:
Collections from customers ($130,000 × 40%) +
($110,000 × 58%).....................................................  115,800
Total cash available before current financing..................  139,800
Less disbursements:
Merchandise purchases................................................. 85,000
Selling and administrative ($50,000 - $8,000).............    42,000
Total disbursements.........................................................  127,000
Excess of cash available over disbursements.................. 12,800
Financing:
Borrowings...................................................................      3,000
Cash balance, ending....................................................... $ 15,800

XIV – with Solution/Answers

The Fraley Company, a merchandising firm, has planned the following sales for the next four
months:

March April May June

 Total budgeted sales........... $50,000 $70,000 $90,000 $60,000

Sales are made 40% for cash and 60% on account. From experience, the company has learned
that a month’s sales on account are collected according to the following pattern:

Month of sale......................................................... 70%

First month following month of sale..................... 20%
Second month following month of sale................. 8%
Uncollectible.......................................................... 2%

The company requires a minimum cash balance of $4,000 to start a month.

Required:
a. Compute the budgeted cash receipts for June.
b. Assume the following budgeted data for June:
Purchases...................................................... $52,000
Selling and administrative expenses............ $10,000
Depreciation................................................. $8,000
Equipment purchases................................... $15,000
Cash balance, beginning of June.................. $6,000

Using this data, along with your answer to part (1) above, prepare a cash budget in good form
for June. Clearly show any borrowing needed during the month. The company can borrow in
any dollar amount, but will not pay any interest until the following month.
Answer:
a. Cash sales, June: $60,000 × 40%................ $24,000
Collections on account:
June: $60,000 × 60% × 70%.................... 25,200
May: $90,000 × 60% × 20%.................... 10,800
April: $70,000 × 60% × 8%.....................    3,360
Total cash receipts....................................... $63,360

b. Cash balance, beginning............................. $ 6,000

Add cash receipts from sales......................  63,360
Total cash available....................................  69,360
Less disbursements:
Purchases................................................. 52,000
Selling and administrative....................... 10,000
Equipment purchases..............................  15,000
Total disbursements....................................  77,000
Deficiency of cash......................................   (7,640)
Financing:
Borrowing............................................... 11,640
Repayments............................................. 0
Interest.....................................................          0
Total financing............................................  11,640
Cash balance, ending.................................. $  4,000

XV – with Solution/Answers
Bledso Supply Corporation manufactures and sells cotton gauze. Expected sales of gauze (in
boxes) for upcoming months are as follows:
June........................ 36,000
July......................... 40,000
August.................... 50,000
September.............. 38,000
October.................. 30,000
November.............. 24,000
December............... 35,000
Management likes to maintain a finished goods inventory equal to 25% of the next month's
estimated sales.
Required:
Prepare the company's production budget for the third quarter of this year (the months of July,
August and September) in good form. Include a column for each month and a total column for
the entire quarter.
Answer:
Bledso Supply Corporation
Production Budget for the Third Quarter
Augus
July t Sept. Total
Expected unit sales........................ 40,000 50,000 38,000 128,000
Add desired ending inventory of
finished goods............................ 12,500   9,500   7,500    7,500
Total needs..................................... 52,500 59,500 45,500 135,500
Less beginning inventory of
finished goods............................ 10,000 12,500   9,500   10,000
Units to be produced...................... 42,500 47,000 36,000 125,500

XVI – with Solution/Answers

Weldon Industrial Gas Corporation supplies acetylene and other compressed gases to industry.
Data regarding the store's operations follow:
Sales are budgeted at $360,000 for November, $380,000 for December, and $350,000
for January.
 Collections are expected to be 75% in the month of sale, 20% in the month
following the sale, and 5% uncollectible.
 The cost of goods sold is 65% of sales.
 The company purchases 60% of its merchandise in the month prior to the
month of sale and 40% 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 $21,900.
 Monthly depreciation is $20,000.
 Ignore taxes.
Statement of Financial Position
October 31
Assets
Cash.............................................................................................. $     16,000
Accounts receivable
(net of allowance for uncollectible accounts)........................... 74,000
Inventory...................................................................................... 140,400
Property, plant and equipment
(net of $500,000 accumulated depreciation)............................  1,066,000
Total assets................................................................................... $1,296,400
Liabilities and Stockholders’ Equity
Accounts payable......................................................................... $   240,000
Common stock............................................................................. 640,000
Retained earnings.........................................................................      416,400
Total liabilities and stockholders’ equity...................................... $1,296,400
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.
Answer:
a. Novembe
r December
 Sales............................................................................ $360,000 $380,000
Schedule of Expected Cash Collections
Accounts receivable.................................................... $  74,000
November sales.......................................................... 270,000 $  72,000
December sales...........................................................                  285,000
Total cash collections.................................................. $344,000 $357,000

b Novembe
. r December
Cost of goods sold...................................................... $234,000 $247,000
Merchandise Purchases Budget
November sales.......................................................... $  93,600
December sales........................................................... 148,200 $  98,800
January sales...............................................................                 136,500
Total purchases........................................................... $241,800 $235,300

Disbursements for merchandise................................. $240,000 $241,800

c. Novembe
r December
Cash receipts............................................................... $344,000 $357,000
Cash disbursements:
Disbursements for merchandise.............................. 240,000 241,800
Other monthly expenses..........................................    21,900    21,900
Total cash disbursements............................................  261,900  263,700
Excess (deficiency) of cash available over
disbursements.......................................................... $  82,100 $  93,300

d Novembe
. r December
Sales............................................................................ $360,000 $380,000
Less bad debt expense................................................ 18,000 19,000
Less cost of goods sold...............................................  234,000  247,000
Gross margin............................................................... 108,000 114,000
Other monthly expenses............................................. 21,900 21,900
Depreciation...............................................................    20,000    20,000
Net operating income................................................. $  66,100 $  72,100
e
. Statement of Financial Position
December 31

Assets
Cash...................... $   191,400
Accounts
receivable
(net of
allowance for
uncollectible
accounts)........... 76,000
Inventory.............. 136,500
Property, plant
and equipment
(net of $540,000
accumulated
depreciation).....  1,026,000
Total assets........... $1,429,900
 Liabilities and
Stockholders’
Equity
Accounts payable. $   235,300
Common stock..... 640,000
Retained earnings.      554,600
Total liabilities
and
stockholders’
equity................ $1,429,900

XVII – with Solution/Answers

Caprice Corporation is a wholesaler of industrial goods. Data regarding the store's operations
follow:
 Sales are budgeted at $350,000 for November, $320,000 for December, and
$300,000 for January.
 Collections are expected to be 80% in the month of sale, 16% in the month
following the sale, and 4% uncollectible.
 The cost of goods sold is 70% of sales.
 The company purchases 60% of its merchandise in the month prior to the
month of sale and 40% in the month of sale. Payment for merchandise is made in
the month following the purchase.
 The November beginning balance in the accounts receivable account is
$78,000.
 The November beginning balance in the accounts payable account is
$254,000.
Required:
a. Prepare a Schedule of Expected Cash Collections for November and December.
b. Prepare a Merchandise Purchases Budget for November and December.
Answer:
a. November December
Sales................................................................................ $350,000 $320,000

Schedule of Expected Cash Collections

Accounts receivable........................................................ $  78,000
November sales............................................................... 280,000 $  56,000
December sales................................................................                  256,000
Total cash collections...................................................... $358,000 $312,000

b. November December
Cost of goods sold........................................................... $245,000 $224,000

Merchandise Purchases Budget

November sales............................................................... $  98,000
December sales................................................................ 134,400 $  89,600
January sales....................................................................                   126,000
Total purchases................................................................ $232,400 $215,600

Disbursements for merchandise...................................... $254,000 $232,400