Data relate to the operations of lim corporation
PROBLEM 1 Completing a Master Budget [L04]
The following data relate to the operations of Lim Corporation, a wholesale distributor of consumer goods:
Current assets as of December 31:
Cash………………………. $6,000
Accounts receivable…………… $36,000
Inventory…………………… $9,800
Buildings and equipment, net ……… $110,885
Accounts payable ……………… $32,550
Common shares……………….. $100,000
Retained earnings ……………… $30,135
a. The gross margin is 30% of sales. (In other words, cost of goods sold is 70% of sales.)
b. Actual and budgeted sales data are as follows:
December (actual) …… $60,000
January ………….. $70,000
February………….. $80,000
March……………. $85,000
April …………….. $55,000
c. Sales are 40% for cash and 60% on credit. Credit sales are collected in the month following sale. The accounts receivable at December 31 are the result of December credit sales.
d. Each month’s ending inventory should equal 20% of the following month’s budgeted cost of goods sold.
e. One-quarter of a month’s inventory purchases is paid for in the month of purchase; the other three-quarters is paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory.
f. Monthly expenses are as follows: commissions, $12,000; rent, $1,800; other expenses (excluding depreciation), 8% of sales. Assume that these expenses are paid monthly. Depreciation is $2,400 for the quarter and includes depreciation on new assets acquired during the quarter.
g. Equipment will be acquired for cash: $3,000 in January and $8,000 in February.
h. Management would like to maintain a minimum cash balance of $5,000 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 $50,000. 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.
Required:
Using the data above:
1. Complete the following schedule:
Schedule of Expected Cash Collections
January February March Quarter
Cash sales $28,000 32,000 34,000 94,000
Credit sales 36,000 42,000 48,000 126,000
Total collections $64,000 74,000 82,000 220,000
2. Complete the following:
Merchandise Purchasing Budget
January February March Quarter
Budgeted cost of goods sold $49,000 56,000 59,500 164,500
Add desired ending inventory 11,200** 11,900 7,700 7,700
Total needs $60,200 67,900 67,200 172,200
Less beginning inventory 9,800 11,200 11,900 9,800
Required purchases $50,400 56,700 55,300 162,400
* $70,000 sales X 70% – $49,000.
** $80,000 X 70% X 20% – $11,200.
Schedule of Expected Cash Disbursements – Merchandise Purchases
January February March Quarter
December purchases $32,550* $32,550
January purchases 12,600 $37,800 50,400
February purchases
March purchases
Total disbursements $45,150 * Beginning balance of the accounts payable
3. Complete the following schedule:
Schedule of Expected Cash Disbursements –
Selling and Administrative Expenses
January February March Quarter
Commissions…………….. $12,000 12,000 12,000 36,000
Rent ……………………. 1,800 1,800 1,800 5,400
Other expenses ……………. 5,600 *6,400 6,800 18,800
Total disbursements ………… $19,400 20,200 20,600 60,200
*Other expenses 80000*.08=6400
4. Complete the following cash budget:
January February March Quarter
Cash balance, beginning ……… $ 6,000
Add cash collections ………… 64,000
Total cash available …………. 70,000
Less cash disbursements:
For inventory ……………. 45,150
For operating expenses …….. 19,400
For equipment …………… 3,000
Total cash disbursements …….. 67,550
Excess (deficiency) of cash ……..$ 2,450
Financing
5. Prepare an absorption costing income statement, similar to the one shown in
Chapter 8, for the quarter ended March 31.
Sales 235,000
Less: COGS 164,500
Gross margin 70,500
Less: selling and administration expenses 60,200
Operating income 10,300
6. Prepare a balance sheet as of March 31.
