Question

Exercise 8-18 (REV) Cash Flows; Budgeted Income Statement and Balance Sheet [LO8-2, LO8-3, LO8-9, LO8-10]

Wolfpack Company is a merchandising company that is preparing a budget for the month of July. It has provided the following information:

Wolfpack Company Balance Sheet June 30
Assets
Cash	$	92,200
Accounts receivable		50,400
Inventory		30,800
Buildings and equipment, net of depreciation		177,000
Total assets	$	350,400
Liabilities and Stockholders’ Equity
Accounts payable	$	53,400
Common stock		100,000
Retained earnings		197,000
Total liabilities and stockholders’ equity	$	350,400

Budgeting Assumptions:

1. All sales are on account. Thirty percent of the credit sales are collected in the month of sale and the remaining 70% are collected in the month subsequent to the sale. The accounts receivable at June 30 will be collected in July.
2. All merchandise purchases are on account. Twenty percent of merchandise inventory purchases are paid in the month of the purchase and the remaining 80% is paid in the month after the purchase.
3. The budgeted inventory balance at July 31 is $17,000.
4. Depreciation expense is $3,540 per month. All other selling and administrative expenses are paid in full in the month the expense is incurred.
5. The company’s cash budget for July shows expected cash collections of $81,300, expected cash disbursements for merchandise purchases of $63,000, and cash paid for selling and administrative expenses of $17,060.

Required:

1. For the month of July, calculate the following:

a. Budgeted sales

b. Budgeted merchandise purchases

c. Budgeted cost of goods sold

d. Budgeted net operating income

2. Prepare a budgeted balance sheet as of July 31.

Answer 1

Answer 1-a.

Cash Collections during July = Accounts Receivable + 30% * Sales during July
$81,300 = $50,400 + 30% * Sales during July
$30,900 = 30% * Sales during July
Sales during July = $103,000

Answer 1-b.

Cash Disbursement during July = Accounts Payable + 20% * Merchandise Purchases during July
$63,000 = $53,400 + 20% * Merchandise Purchases during July
$9,600 = 20% * Merchandise Purchases during July
Merchandise Purchases during July = $48,000

Answer 1-c.

Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory
Cost of Goods Sold = $30,800 + $48,000 - $17,000
Cost of Goods Sold = $61,800

Answer 1-d.

Net Operating Income = Sales - Cost of Goods Sold - Selling and Administrative Expenses - Depreciation
Net Operating Income = $103,000 - $61,800 - $17,060 - $3,540
Net Operating Income = $20,600

Answer 2.

Ending Cash = Beginning Cash + Cash Collections - Cash Disbursements - Selling and Administrative Expenses
Ending Cash = $92,200 + $81,300 - $63,000 - $17,060
Ending Cash = $93,440

Accounts Receivable = 70% * Sales during July
Accounts Receivable = 70% * $103,000
Accounts Receivable = $72,100

Ending Building and Equipment = Beginning Building and Equipment - Depreciation
Ending Building and Equipment = $177,000 - $3,540
Ending Building and Equipment = $173,460

Accounts Payable = 80% * Merchandise Purchases during July
Accounts Payable = 80% * $48,000
Accounts Payable = $38,400

Ending Retained Earnings = Beginning Retained Earnings + Net Operating Income
Ending Retained Earnings = $197,000 + $20,600
Ending Retained Earnings = $217,600