Solved: The following information is for the Newport

Stationery Store Balance Sheet

The following information is for the Newport Stationery Store Balance Sheet

The following information is for the Newport Stationery Store.

Balance Sheet Information as of September 30

Current assets:

Cash ................... $ 14,400

Accounts receivable ............. 12,000

Inventory ................. 76,320

Equipment, net .............. 120,000

Liabilities ................ None

Recent and Anticipated Sales

September ............... $48,000

October ................ 57,600

November ............... 72,000

December ............... 96,000

January ................ 43,200

• Credit sales. Sales are 75% for cash and 25% on credit. Assume that credit accounts are all
collected in the month following the sale. The accounts receivable on September 30 are the
result of the credit sales for September (25% of $48,000). Gross margin averages 30% of sales.
Newport treats cash discounts on purchases in the income statement as “other income.”

• Operating costs. Salaries and wages average 15% of monthly sales; rent, 5%; other operating
costs, excluding amortization, 4%. Assume that these costs are disbursed each month.
Amortization is $1,200 per month.

• Purchases. Newport keeps a minimum inventory of $36,000. The policy is to purchase

additional inventory each month in the amount necessary to provide for the following month’s

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sales. Terms on purchases are 2/10, n/30: a 2% discount is available if the payment is made
within ten days after purchase; no discount is available if payment is made beyond ten days
after purchase; and the full amount is due within thirty days. Assume that payments are made in
the month of purchase and that all discounts are taken.

• Light fixtures. The expenditures for light fixtures are $720 in October and $480 in November.
These amounts are to be capitalized.

Assume that a minimum cash balance of $9,600 must be maintained. Assume also that all
borrowing is effective at the beginning of the month and all repayments are made at the end of
the month of repayment. Loans are repaid when sufficient cash is available. Interest is paid only
at the time of repaying principal. The interest rate is 18% per year. Management does not want
to borrow any more cash than is necessary and wants to repay as soon as cash is available.

Schedule E

Budgeted Cash Receipts and Disbursements

REQUIRED

1. Based on the preceding facts, complete schedule A.

2. Complete schedule B. Note that purchases are 70% of next month’s sales.

3. Complete schedule C.

4. Complete schedule D.

5. Complete schedule E.

6. Complete schedule F. (Assume that borrowings must be made in multiples of $1,000.)

7. What do you think is the most logical type of loan needed by Newport? Explain your
reasoning.

8. Prepare a budgeted income statement for the fourth quarter and a budgeted balance sheet
as of December 31. Ignore income taxes.

9. Some simplifications have been introduced in this problem. What complicating factors would
be met in a typical business situation?

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 The following information is for the Newport Stationery Store Balance Sheet

ANSWER
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