Question

Case 5-1

136 Chapter 5 Operating Activities CASE 5-1 You are the Chief Financial Officer (CFO) for Zen Distributors, Inc., a media broker that secures shelf space in independent bookstores for small publishing companies. As a member of the company's executive team, you are preparing the operating budget for the fourth quarter of 2017. Your intent is to summarize the budget for team members and provide then with detailed schedules that support your overview. Zen's general ledger provides you with current account data on September 30, 2017 (the end of the third quarter) of operations: Accounts (account amounts in thousands of dollars) Debit Credit $ 8,000 20,000 36,000 Accounts receivable Inventory Buildings and equipment, net of depreciation Accounts payable Common stock Retained earnings s 21,750 $184,000 $184,000 Jack Closer, Vice President of Sales, estimated that sales should increase slightly from their fourth quarter levels of the previous year. Per your request, he forwarded his monthly fourth quarter sales estimates to you, along with the current month's actual sales and his forecast for January 2018 Month September (actual) October Nowember December $50,000 72,000 90,000 January 2018 You next met with Mary Balance, Zen's Controller. Ms. Balance informed you that the company prices its products in order to ensure a 25% gross profit margin on sales. Zen has met that margin throughout the first three quarters of 2017, and she was confident that the fim would meet this target margin in the near term. Mary also told you that, on average, 60% of Zen's customer pay in cash. Those customers receive a one percent discount on the invoice price The remaining 40% of the customers pay on account. Credit sales terms are nZEOM. This means credit customers must pay the full invoice price by the end of the month following the month in which they purchased merchandise. Mary explained, "Our customers are pretty sophisticated, and they constantly manage their cash flows-just as we do. Consequently, if we make a credit sale in October, they will pay us by the end of November. Finally, Mary said, "We screen our customers very carefully before extending them credit. Our customers pay what they owe us. We don't have any bad debts, and we don't expect any in the future."

Answer 1

Zen's Distributors Inc Sales Budget Particulars Sales Unit Sales price per unit Sales Volume Oct Dec 1b Schedule of Expected Cash collection Direct Material no. 208 Particulars Cash Sales 60%-1% cash discount Cash collection from customer Account Receivable Cash collection to credit Sales Credit Sales See ste Oct Dec Quarter tep1b.535,640.00 $42,768.00 $53,460.00$131,868.00 $20,000.00 0.00$24,000.00 $20,000.00 Steplb.4 $20,000.00 60,000.00 Step 1b.1 $72,000.00 Step 1b.2 90,000.00 Steplb.3 0$24,000.00 $0.00 $28,800.00 $28,800.00 Dec $20,000.00 $24,000.00$28,800.00 $72,800.00 Cash collection from customer Total cash collection $55,640.00 $66, 768.00 $82,260.00 $204,668.00 Collection of Cash Credit Sales lOct Months |receivd 0% Oct Months |receivd 096 Months |rece d 0% Nov Months re 100% received in m $24,000.00 Oct 100%)received in m see step 1b.5 Credit Sales Nov $28,800.00 Nov Credit Sales Dec $36,000.00 Dec 100%) received in m 100%) received in m ceive 0% 28,800 Months |receivd 0% Dec 100% paid in month 100%) Paid in month Months |receive 0% 36,000 Step1b.4 Account Receivable Credit Sales Sep $20,000.00 Se Months | receive! 0% Sep Months Ireceiud 096 100% Paid in month 100%) Paid in month 20,000

Cash sales Particulars Total Sales Volume Cash sales % Nov Dec Quarter 60,000 60% 72,000 60% 3,200 $432 768 28,800 90,000 60% $54,000 222,000 60% 133,200 $1,332 $131,868 88,800 Sales Discount 1% on cash sales sales cash collection Credit Sales Total sales-Cash Sales $35,640 24,000 553,460 | 36,000 Cost of goods sold Ans -2 Particulars Nov Dec Quarter Sales 60,000 72,000 72,000 54,000 54,000 108,000 43,200 800 90,000 22,500 67,500 28,800 96,300 54,000 300 25% 55500 166500 28,800 195,300 6,000 159,300 Cost of Goods sold (75% ) on sales 75% 45,000 43,200 88,200 36,000 Add:- Desire ending cost of goods sold (See Step 2.2) Total Recuired Units ess:- Beginning Cost of goods sold (See Step 2.3) Purchase of In Step 2.2 Calculation ending inventory of Cost of Goods sold Step 2.3 Calculation Beginning inventory of Cost of Goods sold Note :-ending Cost of Goods sold inventory to equal 80% of the next month's expected unit sales Note :-Beginning finished goods inventory to equal 80% of the current month's expect Beginning inventory-cost of goods sold Current months+% of invent Ending inventory-cost of goods sold of next months* % of inventory Oct Cost of G Sold of Nov 80% Beginning inventory Beginning Inventory Cost of G Sold of Oct 80% Ending inventory Ending inventory Ending inventory Ending inventory Ending inventory Ending in Ending inventory Ending inventory Dec Ending inventory D x Oct x 45,000 36,000 $4,000 oct 43,200 Nov Cost of G Sold of 67,500 Oct ×80% Oct x8096 Beginning Inventory Beginning inventory Beginning Inventory Beginning Inventory Beginning inventory Beginning Inventory Beginning Inventory Oct Nov Nov Nov Dec Dec Dec Dec 80% Cost of G Sold of Nov x8096 Sim, x Nov 54,000 4,000 Dec Cost of G Sold of Jan x 8096 Cost of G Sold of 67,500 54,000 Dec X 80% 36,000

Step 3.3 Particulars Jan Sales Less: Gross profit (25%) on Sales Cost of Goods sold (75% ) on Sales 48,000 12,000 36,000 3b Ex as t for Purchases Invent Direct Material no. 208 Particulars Account Payable Cash paid to credit purchases Total purchases Oct Nov Dec Quarter $21,750.00 Given $21,750.00 $21,750.00 52,200.00 Step 3b.1 $26,100$26,100.00 $64,800.00 Step 3b.2 $42,300.00 Step 3b.3 $0.00$52,200.00 00 $32,400.00 $64,800.00 $21,150.00$21,150.00 Dec Pa ent to creditor 7,850.00 500.00 53,550.00$159,900 Calcualtion Of cash payment Credit purchases Inventory Oct $52,200.00 Oct Months Paid 50%Oct Months Paid 50% $26,100 and and 50% Paid in month 50% Paid in month 26,100 Credit purchases Inventory Nov 64,800.00 Nov Months Paid 50% Nov Months Paid 50% and $32,400 and 50% Paid in month Dec Paid in month 32,400 Credit purchases Inventory Dec $42,300.00 Dec Months paid 50% Dec Months Paid 50% $21,150 and 50% Paid in month 50% Paid in month Step 1b.1 21,150 and Step 4 Selling and Administration Bud Particulars Quarter $222,000 Nov Dec Sales $72,000 $90,000 Commission 12% on sales Administration (fixed General Exp 6% on sales 12% 7,200 2,500 3,600 8,640 2,500 4,320 10,800 2,500 5,400 26,640 7,500 13,320 2500 6% les Volume 13,300 15,460 18,700 $47,460

Sales Volume 13,300 15,460 18,700 $47,460 Step 5 Non Cash Expenses Particulars Oct Nov Dec Quarter Depreciation $850 $850 $850 2,550 Step 6 Interst Expenses Particulars Borrowin Rate of Interest 1% per Months Oct Nov Dec Quarter 4,000 $40 11,000 $11,000 $110 26,000 260 196 $110 Interest Payment at the end of Quarter 260

Cash Budget Particulars Begining cash Balance Oct Nov Dec Quarter $8,000 4,990 4,798 $8,000 Add: Receipts Cash Sales Cash Collection from customer 35,640 42,768 24,000 53,460 28,800 131,868 72,800 20,000 Total Cash Avaliable Less: Cash Disbursment Inventory purchase Commission 12% on sales Administration (fixed General Exp 6% on sales Purchase Equipment 63,640 71,758 87,058 212,668 47,850 7,200 2,500 3,600 1,500 58,500 8,640 2,500 4,320 53,550 10,800 2,500 5,400 159,900 26,640 7,500 13,320 1,500 Total cash disburshment 62,650 73,960 72,250 208,860 990 4,000 3,010 2,202) 4,000 6,202 14,808 4,000 3,808 Excess(Deficiencyjof cash avalibele over disbursment Minimum Cash Balance Cash Requirement Financin Borrowing Repayments Interest Total financing Ending cash balance 4,000 7,000 10,000 260 (10,260) 4,548 11,000 10,000) 260) 740 4,548 4,000 4,990 7,000 4,798 3900

Account receivable Beginning account receivable Add Credit Sales Zen's Distributors Inc Trial Balance Given $20,000.00 $88,800.00 $108,800.00 $72,800.00 36,000.00 Step1b.5 Debit Credit Cash Account receivable Invent Building Equipment Cost of Goods sold Accumulated Depreciation Equipment Account Payable Common Stock Retain Earnings Sales Revenue Discount Interest Ex Depreciation Exp Commission 12% on sales Administration (fixed General Exp 6% on sales Note payable $4,548.00 $36,000.00 $28,800.00 121,500.00 166,500.00 Less:- Cash collection from customer Ending Account receivable Ans -1b Account Payable Beginning account Payble Add Purchase $21,750.00 $159,300.00 $181,050.00 159,900.00 150.00 $2,550.00 $21,150.00 $150,000.00 $12,250.00 $222,000.00 Given Step 2.1 Less:- Payment to supplier Ending Account Payable Ans-3b $1,332.00 $260.00 S2,550.00 $26,640.00 $7,500.00 $13,320.00 Invento Beginning Invento Add Purchases $36,000.00 $159,300.00 $195,300.00 $166,500.00 $28,800 Step 2.1 Less:- Cost of goods sold Ending Closing Invento Step 2.1 $1,000.00 $408,950.00$408,950.00 Building Equipment Beginning Balance Add:- Purchases $120,000.00 $1,500.00 121,500.00 0.00 Cost of good sold Beginning Inventory Add Purchases iven $36,000.00 0$159,300.00 Less Sales Ending Balkance 195,300.00 $28,800.00 166,500 0 Less:- Ending Inventory Cost of good sold 121

Zen's Distributors Inc Income Statement for the Querter ended June-30 Zen's Distributors Inc Balance Sheet As on 30 June Asstes $222,000 $1,332.00 Sales Revenue Less:- Discount Net Sales Revenue Less:-cost of Goods sold $220,668.00 $166,500.00 Current Assets Cash Account receivable Invento $4,548.00 36,000.00 $28,800.00 $54,168.00 Gross Margin Less:- Selling and Administration Exp Commission 12% on sales Administration (fixed General Exp 6% on sales Depreciation Ex $26,640.00 $7,500.00 $13,320.00 $2,550.00 Total Current Assets $69,348.00 Building Equipment Less:- Accumulated Depreciation 121,500.00 $2,550.00 $118,950.00 Total operating Expenses $50,010.00 Total Assets 188,298 Liabilities and Stockholder's Equit Net operating Income Interest expenses Net Income $4,158.00 $260.00 $3,898.00 Current Liabilities Account Payable Note Pavable Current Liabilities 21,150.00 1,000.00 Zen's Distributors Inc $22,150.00 Statement Retain Earnin 12,250.00 $3,898.00 $16,148.00 $0.00 $16,148.00 $22,150.00 Beginning Balance Add:- Net income Total Liabilities Stock Holders Equity Common Stock Retain Earni 150,000.00 $16,148.00 Less: Dividend Ending Balance $166,148.00 16,148 188,298