Question

Minden Company is a wholesale distributor of premium European chocolates. The company’s balance sheet as of April 30 is given below:

Minden Company Balance Sheet April 30
Assets
Cash	$	9,000
Accounts receivable		54,000
Inventory		30,000
Buildings and equipment, net of depreciation		207,000
Total assets	$	300,000
Liabilities and Stockholders’ Equity
Accounts payable	$	63,000
Note payable		14,500
Common stock		180,000
Retained earnings		42,500
Total liabilities and stockholders’ equity	$	300,000

  

The company is in the process of preparing a budget for May and has assembled the following data:

  

a.	Sales are budgeted at $200,000 for May. Of these sales, $60,000 will be for cash; the remainder will be credit sales. One-half of a month’s credit sales are collected in the month the sales are made, and the remainder is collected in the following month. All of the April 30 accounts receivable will be collected in May.
b.	Purchases of inventory are expected to total $120,000 during May. These purchases will all be on account. Forty percent of all purchases are paid for in the month of purchase; the remainder are paid in the following month. All of the April 30 accounts payable to suppliers will be paid during May.
c.	The May 31 inventory balance is budgeted at $40,000.
d.	Selling and administrative expenses for May are budgeted at $72,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,000 for the month.
e.	The note payable on the April 30 balance sheet will be paid during May, with $100 in interest. (All of the interest relates to May.)
f.	New refrigerating equipment costing $6,500 will be purchased for cash during May.
g.	During May, the company will borrow $20,000 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

  

Required:
1-a.	Prepare a schedule of expected cash collections from sales and a schedule of expected cash disbursements for merchandise purchases..

  

1-b.	Prepare a cash budget for May. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

  

2.	Prepare a budgeted income statement for May.

  

3.	Prepare a budgeted balance sheet as of May 31.

Answer 1

Concepts and reason

Budgets: A budget is a written plan for a defined activity to be executed by the entity which is expressed in quantitative terms. A budget often serves as a road map to approach the expenditure and the other financing activities of a business. It directs the funds of an organization to be used in a most appropriate and planned manner so as to achieve the targets.

However, budget does not always serve as fool proof tool to achieve the required targets as they are based on estimates. It cannot eliminate the need of necessary personnel to execute the operations so as to achieve the target.

An entity prepares different types of budgets which include:

• Sales Budget

• Cash budget

• Expenditure budget

• Receivables budget

• Production budget etc.

Fundamentals

Sales budget: Sales budget is prepared to calculate the expected number of units to be sold in particular period. It includes not only the number units but also the price at which the entity is expected makes the sales. Sales budget can be prepared for the entire year or for a particular period, say quarter etc. Further, it is important for an enterprise to make the estimation related to the expected volume of sales and the selling price efficiently so as to have an effective control on the corresponding budgets like expenditure budget, collection budget which is also incorporates the expected sales figure.

Cash Collection budget: It is prepared to know the estimated cash that would be collected from the customers for the sales made during a period. Sales budget plays a vital role in the preparation of cash collection budget as the estimation of collection is based on the expected sales.

Cash disbursement budget: It is prepared to know the estimated cash that would be expended (disbursed) due to the purchases to be made during a period. A purchase budget plays a vital role in the preparation of cash disbursement budget as the estimation of is based on the expected purchases of the inventory.

Cash Budget: Cash budget is prepared to know the estimated cash balance that would be available with the organization at the end of certain period. It includes all the estimated expenses, receipts along with the repayment of loans, new loans etc. A cash budget helps in knowing the minimum balance that a business is required to maintain for that period so as to avoid any unnecessary expenditure.

1-a.

Prepare a schedule of expected cash collections from sales and expected cash disbursements for merchandise purchases as provided below:

Thus the Expected cash receipts from sales and cash disbursements for merchandise purchases are $184,000 and $111,000 respectively.

1-b.

Prepare cash budgets for the month of May as provided below:

Thus, the Expected ending cash balance is $8,900.

2.

Prepare budgeted income statement as provided below:

Workings:

1. Calculation of cost of goods sold

Thus, the budgeted net income for the month ending May is $15,900.

3.

Prepare budgeted balance sheet as of May 31 as provided below:

Thus, the amount of total assets and liabilities in the balance sheet is $330,400.

Ans: Part 1-a

The expected cash receipts from sales and cash disbursements for merchandise purchases are $184,000 and $111,000 respectively

Part 1-b

The Expected ending cash balance is $8,900.

Part 2

The budgeted net income for the month ending May is $15,900.

Part 3

The amount of total assets and liabilities in the balance sheet is $330,400.