Wheeling Company is a merchandiser that provided a balance sheet as of September

Question

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:

Sales are budgeted at $400,000 for October and $410,000 for November. Of these sales, 35% will be for cash; the remainder will be credit sales. Forty percent 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. All of the September 30 accounts receivable will be collected in October.

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.

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 following month. All of the September 30 accounts payable to suppliers will be paid during October.

Selling and administrative expenses for October are budgeted at $86,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,790 for the month.

Required:

1. 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 50% 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 80% are paid for in the following month. Using these new assumptions, 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. Net operating income for the month of October.

e. A budgeted balance sheet at October 31.

Wheeling Company
Balance Sheet
September 30 Assets Cash $ 71,600 Accounts receivable 122,000 Inventory 54,000 Buildings and equipment, net of depreciation 279,000 Total assets $ 526,600 Liabilities and Stockholders’ Equity Accounts payable $ 155,600 Common stock 216,000 Retained earnings 155,000 Total liabilities and stockholders’ equity $ 526,600

Explanation / Answer

1 a. The budgeted cash collections for October: Budgeted sales=$400000. Cash sales=400000*35%=140000 (a) Credit sales=400000*65%=260000 40% of credit sales collected in october=260000*40%=$ 104000 (b) Accounts receivable collected in october=$122000 (c) Budgeted cash collection=(a)+(b)+©=140000+104000+122000=$ 366000 b. The budgeted merchandise purchases for October: Cost of goods sold=Beginning inventory+Purchase-Ending inventory Rearrange this formula to get budgeted merchandise purchase Purchase=Ending inventory+cost of goods sold-beginning inventory Ending inventory=30% of following months cost of goods sold Following months cost of goods sold=Following months sales*45%=410000*45%=$ 184500 Ending inventory=184500*30%=$ 55350 Cost of goods sold for october=400000*45%=$ 180000 Beginning inventory=$ 54000 Purchase=55350+180000-54000=$ 181350 c. The budgeted cash disbursements for merchandise purchases for October: Budgeted merchandise purchase=$ 181350 30% in the same month (181350*30%) 54405 Accounts payable collected 155600 Budgeted cash disbursment 210005 d. The budgeted net operating income for October: $ $ Sales 400000 Less: cost of goods sold 180000 Gross profit 220000 Less: Selling and administrative expenses 86000 Depreciation 2790 88790 Net operating income 131210 e. budgeted balance sheet at October 31: $ Assets Cash (Note:1) 141595 Accounts receivable (Note:2) 156000 Inventory (From b.) 55350 Buildings and equipment (279000-2790) 276210 Total assets 629155 Liabilities and Stockholders’ Equity Accounts payable (Note:3) 126945 Common stock 216000 Retained earnings (Add net operating income) 286210 Total liabilities and stockholders’ equity 629155 Note:1-Cash balance $ Beginning balance 71600 Add: Budgeted cash collection 366000 437600 Less: Budgeted cash disbursement for merchandise 210005 Selling and administrative expenses 86000 296005 Ending balance 141595 Note:2-Accounts receivable balance=60% of credit sales=260000*60%=$ 156000 Note:3-Accounts payable balance=70% of purchases=181350*70%=$ 126945 2 a. The budgeted cash collections for October: Budgeted sales=$400000. Cash sales=400000*35%=140000 (a) Credit sales=400000*65%=260000 50% of credit sales collected in october=260000*50%=$ 130000 (b) Accounts receivable collected in october=$122000 (c) Budgeted cash collection=(a)+(b)+©=140000+130000+122000=$ 392000 b. The budgeted merchandise purchases for October: Cost of goods sold=Beginning inventory+Purchase-Ending inventory Rearrange this formula to get budgeted merchandise purchase Purchase=Ending inventory+cost of goods sold-beginning inventory Ending inventory=10% of following months cost of goods sold Following months cost of goods sold=Following months sales*45%=410000*45%=$ 184500 Ending inventory=184500*10%=$ 18450 Cost of goods sold for october=400000*45%=$ 180000 Beginning inventory=$ 54000 Purchase=18450+180000-54000=$ 144450 c. The budgeted cash disbursements for merchandise purchases for October: Budgeted merchandise purchase=$ 144450 20% in the same month (144450*20%) 28890 Accounts payable collected 155600 Budgeted cash disbursment 184490 d. The budgeted net operating income for October: $ $ Sales 400000 Less: cost of goods sold 180000 Gross profit 220000 Less: Selling and administrative expenses 86000 Depreciation 2790 88790 Net operating income 131210 e. budgeted balance sheet at October 31: $ Assets Cash (Note:1) 193110 Accounts receivable (Note:2) 130000 Inventory (From b.) 18450 Buildings and equipment (279000-2790) 276210 Total assets 617770 Liabilities and Stockholders’ Equity Accounts payable (Note:3) 115560 Common stock 216000 Retained earnings (Add net operating income) 286210 Total liabilities and stockholders’ equity 617770 Note:1-Cash balance $ Beginning balance 71600 Add: Budgeted cash collection 392000 463600 Less: Budgeted cash disbursement for merchandise 184490 Selling and administrative expenses 86000 270490 Ending balance 193110 Note:2-Accounts receivable balance=50% of credit sales=260000*50%=$ 130000 Note:3-Accounts payable balance=80% of purchases=144450*80%=$ 115560

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