Question

VeeLance Company is a merchandiser that provided a balance sheet as of September 30 as shown below: VeeLance Company Balance Sheet September 30 Assets Cash $ 69,400 Accounts receivable 166,000 Inventory 83,700 Buildings and equipment, net of depreciation 257,000 Total assets $ 576,100 Liabilities and Stockholders’ Equity Accounts payable $ 246,600 Common stock 216,000 Retained earnings 113,500 Total liabilities and stockholders’ equity $ 576,100 ________________________________________ The company is in the process of preparing a budget for October and has assembled the following data: 1. Sales are budgeted at $620,000 for October and $630,000 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. 2. 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. 3. 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. 4. Selling and administrative expenses for October are budgeted at $83,800, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,570 for the month. Required: • Using the information provided, calculate or prepare a statement for each of the following: a. Budgeted cash collections for October. b. Budgeted merchandise purchases for October. c. Budgeted cash disbursements for merchandise purchases for October. d. Budgeted net operating income for October. e. Budgeted balance sheet at October 31. • Explain, in your own words, the purpose of a budget. o Does it guarantee performance? o Does it ensure that a company will be profitable? • Assume that the company desires a gross profit margin (ratio) of 45%. If the budget is met, will the company meet the desired goal? Explain.

Answer 1

Answer is given below

October $620,000 Budgeted Sales (value) October $217,000 35% of sales Expected Cash Collection Cash Sales Collections on Accounts Receivable Opening balance October month collection Total cash receipts $166,000 $161,200 $544,200 Sales Cost of goods sold October $620,000 $279,000 November $630,000 $283,500 Material purchase Cost of goods sold Add: Closing stock Total needs Less: Opening stock Budgeted Material purchase October $279,000 $85,050 30% of $283,500 $364,050 $83,700 $280,350 Expected Cash disbursements September month Account payable balance October purchase Total cash disbursements October $246,600 $84,105 30% of current month purchases $330,705 CASH BUDGET October $69,400 $544,200 $613,600 Opening Balance Cash collections from Customers Total Cash available Cash paid for Purchase of inventory Selling and administration expense $330,705 $83,800 Total Cash disbursements Ending Cash balance $414,505 $199,095 $620,000 Veelance Company Budgeted Income Statement for October month Sales Cost of Goods sold Opening stock $83,700 Les: Purchases $280,350 $364,050 Less: Closing stock $85,050 Cost of Goods sold Gross Profit Less: Expenses Selling and administration expense $83,800 Depreciation $2,570 Net profit $279,000 $341,000 $86,370 $254,630 Veelance Company Budgeted Balance Sheet As on October 31 Assets Cash Accounts receivable Inventory Building and Equipment $257,000 Less : Depreciation during the month -$2,570 Total Assets Liabilities and Stockholders' Equity Accounts payable $199,095 $241,800 $85,050 $254,430 $780,375 $196,245 Common stock Retained earnings Total Liabilities and Stockholders' Equity $216,000 $368,130 $780,375 Retained earnings Opening balance Add: Net profit Closing balance of Retained earnings $113,500 $254,630 $368,130 A Budget is a formal course of action in monetary terms. A budget is set at beginning of the year It is a business plan which needs to be executed by all departments in the organisation It helps in allocation of resources It helps in setting targets for the employees It is a source of motivation It helps in performance evaluation It helps in cost control and cost reduction A Budget des not guarantee a performance rather it can be used as tool for guiding the performance It does not ensure company will be profitable since the actual business conditions might vary from the business conditions assumed while budgeting Yes if Budgeted Gross margin of 45% is set and if budget is met the desired goal will be achieved If budget targets are met the actual results will be same as budget.