EXERCISES ON PROJECTED FINANCIAL STATEMENTS

Problem 1. I/S Inc., a one-product mail-order firm, buys its product for P75 per unit and sells it for
P140 per unit. The sales sta receives a 10% commission on the sale of each unit. Its March income
statement follows:

I/S Inc.
Income Statement
For Month Ended March 31, 2022
Sales P 1,400,000
Cost of Goods Sold 750,000
Gross Profit P 650,000
Expenses
Sales commissions (10%) 140,000
Advertising 215,000
Store rent 26,000
Administrative Salaries 42,000
Depreciation 52,000
Other Expenses 13,000
Total Expenses P 488,000
Net Income P 162,000
Management expects March’s results to be reported in April, May, and June 2022 without any changes
in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at
a rate of 10% each month for the next three months (beginning with April) it the item’s selling price is
reduced to P130 per unit and advertising expenses are increased by 20% and remain at that level for
all three months. The cost of its products will remain at P75 per units, the sales sta will continue to
earn 10% commission, and the remaining expenses will stay the same.

Required: Prepare a budgeted income statements for each of the months of April, May, and June that
show the expected results from implementing the proposed changes. Use a three-column format,
with one column for each month.

Problem 2. The balance sheet (in Peso) for Araullo, Inc. at December 31, 2021 is as follows:

ASSETS LIABILITIES AND EQUITY

Cash 90,000 Accounts Payable 80,000
Accounts Receivable 120,000 Capital Stock 300,000
Inventory 130,000 Retained Earnings 310,000
Property, Plant and equipment, 350,000
net
TOTAL ASSETS 690,000 TOTAL LIAB & EQUITY 690,000
For the year 2022, cash receipts are estimated at P860,000, representing collection of accounts
receivable. Cash payments are budgeted at P830,000. Included in these payments is P150,000 for
various expenses that do not flow through accounts payable. Credits for the accounts payable for
the year are estimated at P740,000, all merchandise purchases. All cash payments are for expenses
or purchases. Depreciation expense is P60,000. Net sales are estimated at P1,200,000. The inventory
of merchandise is expected to increase to P150,000 by the end of the year. Income tax is estimated
at 30% and will be paid after December 31, 2022.

Required: From the information given, prepare a budgeted balance sheet at December 31, 2022.
Prove the retained earnings balance by computing the net income.

Problem 3. Smiles FS Company is a wholesale distributor of electronic dental braces. The company’s
balance sheet as of April 30 is given below:

ASSETS
Cash 9,000
Accounts receivable, customers 54,000
Inventory 30,000
Buildings, equipment, net of depreciation 207,000
TOTAL ASSETS 300,000
LIABILITIES & STOCKHOLDER’S EQUITY
Accounts Payable 63,000
Note Payable 14,500
Capital Stock, no par 180,000
Retained Earnings 42,500
TOTAL LIABILITIES & STOCKHOLDER’S EQUITY 300,000
The company is in the process of preparing a budget for May. A number of budget items have already
been prepared, as stated below:

a. Sales are budgeted at P200,000 for May. Of these sales, P60,000 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 April 30
receivables will be collected in May.
b. Purchases on inventory are expected to total P120,000 during May. These purchases will all
be on account. Forty percent of all purchases are paid for in the month of purchase, the
remainder is paid in the following month. All the April 30 accounts payable to suppliers will
be paid during May.
c. The May 31 inventory balance is budgeted at P40,000.
d. Operating expenses for May are budgeted at P72,000, exclusive of depreciation. These
expenses will be paid in cash. Depreciation is budgeted at P2,000 for the month.
e. The note payable on the April 30 balance sheet will be paid in May, with P100 in interest. (All
interest relates to May).
f. New refrigerating equipment costing P6,500 will be purchased for cash in June.
g. During May, the company will borrow P20,000 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. Prepare a budgeted income statement for May. Use the traditional income statement format.
2. Prepare a budgeted balance sheet as of May 31.