Question

a. Budgeted monthly absorption costing income statements for April-July are: April May June July $ 470,000 $1,000,000 $450,000 $ 350,000 329,000 700,000 315,000 245,000 141,000 300,000 135,000 105,000 Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling expense Administrative expense Total selling and administrative expenses Net operating income 91,000 42,500 133,500 7,500 $ 95,000 56,800 151,800 148,200 $ 56,000 35,000 9 1,000 44,000 $ 35,000 33,000 68,000 37,000 $ *Includes $17,000 of depreciation each month. b. Sales are 20% for cash and 80% on account. c. Sales on account are collected over a three-month period with 10% collected in the month of sale; 70% collected in the first month following the month of sale, and the remaining 20% collected in the second month following the month of sale. February's sales totaled $165,000, and March's sales totaled $225,000. d. Inventory purchases are paid for within 15 days. Therefore, 50% of a month's inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $95,900. e. Each month's ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $65,800. f. Dividends of $25,000 will be declared and paid in April. g. Land costing $33,000 will be purchased for cash in May. h. The cash balance at March 31 is $47,000; the company must maintain a cash balance of at least $40,000 at the end of each month. i. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter The company's president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revises the cash collection and ending inventory assumptions as follows: a. Sales continue to be 20% for cash and 80% on credit. However, credit sales from April, May, and June are collected over a three- month period with 25% collected in the month of sale, 65% collected in the month following sale, and 10% in the second month following sale. Credit sales from February and March are collected during the second quarter using the collection percentages specified in the main section.

Answer 1

February 1,65,000 33,000 1,32,000 March 2,25,000 1345,000 1,80,000 Particulars Sales Cash sales (20%) Credit sales (80%) COGS Ending inventory (15%) Opening inventory Purchases April 4,70,000 94,000 3,76,000 3,29,000 1,05,000 65,800 3,68,200 May May 10,00,000 2,00,000 8,00,000 7,00,000 47,250 1,05,000 ,42,250 June 4,50,000 90,000 3,60,000 3,15,000 36,750 47,250 3,04,500 July 3,50,000 70,000 2,80,000 2,45,000 65,800 36,750 6 Schedule of expected cash collections April May 2,00,000 June 90,000 Quarter 3,84,000 94,000 Cash sales Sales on account February March April May June Total cash collections 13,200 1,17,000 94,000 18,000 2,44,400 2,00,000 37,600 5,20,000 90,000 7,37,600 13,200 1,35,000 3,76,000 7,20,000 90,000 17,18,200 3,18,200 6 ,62,400