Question

Vernon, Inc. sells fireworks. The company’s marketing director developed the following cost of goods sold budget for April, May, June, and July.

	April	May	June	July
Budgeted cost of goods sold	$79,000	$89,000	$99,000	$105,000

Vernon had a beginning inventory balance of $2,800 on April 1 and a beginning balance in accounts payable of $15,300. The company desires to maintain an ending inventory balance equal to 10 percent of the next period’s cost of goods sold. Vernon makes all purchases on account. The company pays 65 percent of accounts payable in the month of purchase and the remaining 35 percent in the month following purchase.  

Required

1. Prepare an inventory purchases budget for April, May, and June.

2. Determine the amount of ending inventory Vernon will report on the end-of-quarter pro forma balance sheet.

3. Prepare a schedule of cash payments for inventory for April, May, and June.

4. Determine the balance in accounts payable Vernon will report on the end-of-quarter pro forma balance sheet.

Answer 1

Solution a:

Inventory Purchase Budget - Vernon Inc.
Particulars	April	May	June	Total
Budgeted COGS	$79,000.00	$89,000.00	$99,000.00	$267,000.00
Add: Desired Ending inventory (10% of next month COGS)	$8,900.00	$9,900.00	$10,500.00	$10,500.00
Cost of goods available for sales	$87,900.00	$98,900.00	$109,500.00	$277,500.00
Less: Beginning inventory	$2,800.00	$8,900.00	$9,900.00	$2,800.00
Budgeted Purchases	$85,100.00	$90,000.00	$99,600.00	$274,700.00

Solution b:

Amount of ending inventory Vernon will report on the end-of-quarter pro forma balance sheet = $10,500

Solution c:

Schedule of Cash payments
Particulars	April	May	June	Total
Accounts payable	$15,300.00			$15,300.00
April Purchases	$55,315.00	$29,785.00		$85,100.00
May Purchases		$58,500.00	$31,500.00	$90,000.00
June Purchases			$64,740.00	$64,740.00
Budgeted Purchases	$70,615.00	$88,285.00	$96,240.00	$255,140.00

Solution d:

balance in accounts payable Vernon will report on the end-of-quarter pro forma balance sheet = $99,600*35% = $34,860