ACT2121

Review Session 6 Questions

PROBLEM 8–19 Cash Budget; Income Statement; Balance Sheet LO8–2, LO8–4, LO8–8, LO8–9, LO8–10
Minden Company is a wholesale distributor of premium European chocolates. The company’s balance sheet as
of April 30 is given below:

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. Calculate the expected cash collections from customers for May.
2. Calculate the expected cash disbursements for merchandise purchases for May.
3. Prepare a cash budget for May.

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4. Using Schedule 9 as your guide, prepare a budgeted income statement for May.
5. Prepare a budgeted balance sheet as of May 31.

PROBLEM 8–29 Completing a Master Budget LO8–2, LO8–4, LO8–7, LO8–8, LO8–9, LO8–10
The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:

a. The gross margin is 25% of sales.

c. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The
accounts receivable at March 31 are a result of March credit sales.
d. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods
sold.
e. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid
for in the following month. The accounts payable at March 31 are the result of March purchases of
inventory.
f. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,500 per month; other expenses
(excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is
$900 per month (includes depreciation on new assets).
g. Equipment costing $1,500 will be purchased for cash in April.
h. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each
month. The company has an agreement with a local bank that allows the company to borrow in
increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The
interest rate on these loans is 1% per month and for simplicity we will assume that interest is not
compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the
end of the quarter.

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Required:

Using the preceding data:

1. Complete the following schedule:

2. Complete the following:

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 3. Complete the following cash budget:

4. Using Schedule 9 as your guide, prepare an absorption costing income statement for the quarter
ended June 30.
5. Prepare a balance sheet as of June 30.

PROBLEM 8–30 Integration of the Sales, Production, and Direct Materials Budgets LO8–2, LO8–3, LO8–4
Milo Company manufactures beach umbrellas. The company is preparing detailed budgets for the
third quarter and has assembled the following information to assist in the budget preparation:

a. The Marketing Department has estimated sales as follows for the remainder of the year (in units):

The selling price of the beach umbrellas is $12 per unit.

b. All sales are on account. Based on past experience, sales are collected in the following pattern:
30% in the month of sale
65% in the month following sale
5% uncollectible
Sales for June totaled $300,000.

c. The company maintains finished goods inventories equal to 15% of the following month’s sales. This
requirement will be met at the end of June.
d. Each beach umbrella requires 4 feet of Gilden, a material that is sometimes hard to acquire. Therefore,
the company requires that the ending inventory of Gilden be equal to 50% of the following month’s
production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be:

e. Gilden costs $0.80 per foot. One-half of a month’s purchases of Gilden is paid for in the month of
purchase; the remainder is paid for in the following month. The accounts payable on July 1 for
purchases of Gilden during June will be $76,000.

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Required:
1. Calculate the estimated sales, by month and in total, for the third quarter (Hint: Refer to Schedule 1 for
guidance).
2. Calculate the expected cash collections, by month and in total, for the third quarter (Hint: Refer to Schedule
1 for guidance).
3. Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September,
and October (Hint: Refer to Schedule 2 for guidance).
4. Calculate the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third
quarter (Hint: Refer to Schedule 3 for guidance).
5. Calculate the cost of the raw material (Gilden) purchases by month and in total, for the third quarter (Hint:
Refer to Schedule 3 for guidance).
6. Calculate the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for
the third quarter (Hint: Refer to Schedule 3 for guidance).