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Hi John,
Here the question
Weller Industrial Gas Corporation supplies acetylene and other compressed gases to
industry. Data regarding the store’s operations follow:
? Sales are budgeted at $330,000 for November, $300,000 for December, and
$320,000 for
? Collections are expected to be 85% in the month of sale, 14% in the month
following the sale, and 1% uncollectible.
? The cost of goods sold is 60% of sales.
? The company purchases 80% of its merchandise in the month prior to the month
of sale and 20% in the month of sale. Payment for merchandise is made in the
month following the purchase.
? Other monthly expenses to be paid in cash are $21,200.
? Monthly depreciation is $21,000.
? Ignore taxes.Statement of Financial Position
October 31Assets:
Cash $22,000
Accounts receivable (net of allowance for uncollectible accounts) 83,000
Inventory 158,400
Property, plant and equipment (net of $594,000 accumulated depreciation) 1,004,000Total assets $1,267,400
Liabilities and Stockholders’ Equity:
Accounts payable $196,000
Common stock 620,000
Retained earnings 451,400Total liabilities and stockholders’ equity $1,267,400
1. Prepare a Merchandise Purchases Budget for November and December.
From the information given: The company purchases 80% of its merchandise in the month prior to the month
of sale and 20% in the month of sale. Payment for merchandise is made in the
month following the purchase.Answer:
____________________________________November December
Cost of goods sold……………………………………$198,000….$180,000Merchandise Purchases Budget
November sales……………………………………….$ 39,600
December sales……………………………………….$144,000…..$ 36,000
January sales…………………………………………………………….$153,600Total purchases………………………………………..$183,600….$189,600
Disbursements for merchandise…………………$196,000…..$183,600
But here my Question:
Why the merchandise purchase budget is calculated by the percentages of cost of goods sold but not from the sales i.e. why not November = 80% of December Sales 300,000 and 20% of November sales 330,000?
In other questions, i saw there are production budget then calculate the material budget but this question is different, i can’t calculate.
Thanks.
The purchases budget is budgeting the cost of the purchases in each month.
Given that the cost of the goods is only 60% of the selling price, the cost of what is bought is only 60% of the sales revenue.(Have you watched my free lectures on budgeting?)
@johnmoffat said:
The purchases budget is budgeting the cost of the purchases in each month.
Given that the cost of the goods is only 60% of the selling price, the cost of what is bought is only 60% of the sales revenue.(Have you watched my free lectures on budgeting?)
I have watched your free lectures. 🙂
There are other questions of the above: Question 2) Prepare a Schedule of Expected Cash Collections for November and December and Question 3) Prepare Cash Budgets for November and December.
In question 2, I calculated the total cash collection in Nov is $363,500 and in Dec is $301,200
And in question 3, the answer book is
_________________________________________________November…December
Cash receipts…………………………………………………………………$363,500…….$301,200
Cash disbursements:
Disbursements for merchandise……………………………………….$196,000……$183,600Other monthly expenses………………………………………………….$21,200……..$21,200
Total cash disbursements………………………………………………..$217,200…….$204,800
Excess (deficiency) of cash available over disbursements…..$146,300……..$96,400
My problem: Do I need to add the cash item of the SOFP of October $22,000 to November as the beginning cash balance. The answer book hasnt included the cash $22,000 in the answer and i dont know the reason. If need to add the beginning cash balance then the ending cash balance for November should be $146,300 + $22,000?
Thanks John!
The brought forward balance is not relevant for calculating the excess cash available each month.
If the question required you to calculate the cash balance at the end of each month, then you would need to take into account the opening balance.
@johnmoffat said:
The brought forward balance is not relevant for calculating the excess cash available each month.If the question required you to calculate the cash balance at the end of each month, then you would need to take into account the opening balance.
Thanks John. If the question heading just said “Prepare Cash Budgets for the month” then I think the brought forward will have to be included?? otherwise just as you said.
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