Chapter 6 Exercise Answer Key

Use the following to answer questions 1-9:

Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow:

 Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January.
 Collections are expected to be 65% in the month of sale, 33% in the month following the sale, and 2%
uncollectible.
 The cost of goods sold is 80% of sales.
 The company purchases 70% of its merchandise in the month prior to the month of sale and 30% 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 $21,100.
 Monthly depreciation is $21,000.
 Ignore taxes.

Statement of Financial Position

October 31
Assets:
Cash............................................................................................... $    25,000
Accounts receivable
(net of allowance for uncollectible accounts)............................ 77,000
Inventory........................................................................................ 162,400
Property, plant and equipment
(net of $624,000 accumulated depreciation)..............................  1,026,000
Total assets..................................................................................... $1,290,400

Liabilities and Stockholders’ Equity:

Accounts payable........................................................................... $   239,000
Common stock............................................................................... 740,000
Retained earnings...........................................................................      311,400
Total liabilities and stockholders’ equity....................................... $1,290,400

1. Expected cash collections in December are:

A) $310,000
B) $95,700
C) $297,200
D) $201,500

Solution:

December sales ($310,000 × 65%)..... $201,500

November sales ($290,000 × 33%)..... 95,700
Total.................................................... $297,200
2. The cost of December merchandise purchases would be:
A) $248,000
B) $232,000
C) $117,600
D) $192,000

Solution:

Sales Cost of Goods Sold

November............................................ $290,000 $232,000
December............................................ $310,000 $248,000
January................................................ $210,000 $168,000
Merchandise purchases = Ending inventory + Cost of goods sold − Beginning inventory = ($168,000 ×
70%) + $248,000 − ($248,000 × 70%)
= $117,600 + $248,000 − $173,600 = $192,000

3. December cash disbursements for merchandise purchases would be:

A) $192,000
B) $243,200
C) $117,600
D) $248,000

Solution:

Cost of
Sales Goods Sold
November............................................ $290,000 $232,000
December............................................ $310,000 $248,000
January................................................ $210,000 $168,000
December cash disbursements = 70% of December Cost of Goods Sold + 30% of November Cost of
Good Sold = (70% × $248,000) + (30% × $232,000)
= $173,600 + $69,600 = $243,200

4. The excess (deficiency) of cash available over disbursements for December would be:
A) $46,600
B) $19,200
C) $13,700
D) $32,900

Solution:

Cash collections − Cash disbursements − Other monthly expenses

= $297,200 − $243,200 − $21,100 = $32,900
5. The net income for December would be:
A) $13,700
B) $32,900
C) $40,900
D) $19,900

Solution:

Sales.................................................... $310,000
Less uncollectible ($310,000 × 2%).... 6,200
Net sales.............................................. 303,800
Cost of goods sold ($310,000 × 80%). 248,000
Other expenses.................................... 21,100
Depreciation expenses......................... 21,000
Net income.......................................... $ 13,700

6. The cash balance at the end of December would be:

A) $63,300
B) $25,000
C) $57,900
D) $38,300

Solution:

November December
October Accounts Receivable Balance ..... $ 77,000
Collection of November Sales...................
$290,000 × 65%...................................... 188,500
$290,000 × 33%...................................... $ 95,700
Collection of December Sales....................
$310,000 × 65%...................................... 201,500
October Accounts Payable Balance........... (239,000)
Payment for November Purchases.............
($290,000 × 80%) × 30%........................ (69,600)
($310,000 × 80%) × 70%........................ (173,600)
Other cash monthly expenses..................... (21,100) (21,100)
Net cash inflow(outflow) per month.......... $ 5,400 $ 32,900

Beginning cash balance, October 31.......................... $25,000

Add November net cash inflow.................................. 5,400
Add December net cash inflow.................................. 32,900
Ending cash balance, December 31............................ $63,300
7. The accounts receivable balance, net of uncollectible accounts, at the end of December would be:
A) $102,300
B) $198,000
C) $83,200
D) $108,500

Solution:

From December sales ($310,000 × 33%): $102,300

8. Accounts payable at the end of December would be:

A) $192,000
B) $248,000
C) $117,600
D) $74,400

Solution:

Sales Cost of Goods Sold

November............................................ $290,000 $232,000
December............................................ $310,000 $248,000
January................................................ $210,000 $168,000
Merchandise purchases = Ending inventory + Cost of goods sold − Beginning inventory = ($168,000 ×
70%) + $248,000 − ($248,000 × 70%)
= $117,600 + $248,000 − $173,600 = $192,000

9. Retained earnings at the end of December would be:

A) $325,100
B) $311,400
C) $335,200
D) $347,200

Solution:

Net income in November:

Sales.................................................... $290,000
Less uncollectible ($290,000 × 2%).... 5,800
Net sales.............................................. 284,200
Cost of goods sold ($290,000 × 80%). 232,000
Other expenses.................................... 21,100
Depreciation expenses......................... 21,000
Net income.......................................... $ 10,100
Retained earnings in December = Retained earnings in October + Net income in November + Net
income in December = $311,400 + $10,100 + $13,700 = $335,200
10. The Doley Company has planned the following sales for the next three months:

Jan Feb Mar

Budgeted sales....... $40,000 $50,000 $70,000

Sales are made 20% for cash and 80% on account. From experience, the company has learned that a
month’s sales on account are collected according to the following pattern:

Month of sale................................. 60%

First month following sale............. 30%
Second month following sale......... 8%
Uncollectible.................................. 2%

The company requires a minimum cash balance of $5,000 to start a month. The beginning cash balance
in March is budgeted to be $6,000.

Required:

a. Compute the budgeted cash receipts for March.

b. The following additional information has been provided for March:

Inventory purchases (all paid in March).............................. $28,000

Selling and administrative expenses (all paid in March)..... $40,000
Depreciation expense for March......................................... $5,000
Dividends paid in March..................................................... $4,000

Prepare a cash budget in good form for the month of March, using this information and the budgeted
cash receipts you computed for part (1) above. The company can borrow in any dollar amount and will
not pay interest until April.

Ans:

a. Cash sales, March: $70,000 × 20%......... $14,000

Collections on account:
Jan. sales: $40,000 × 80% × 8%.............. 2,560
Feb. sales: $50,000 × 80% × 30%........... 12,000
Mar. sales: $70,000 × 80% × 60%..........  33,600
Total cash receipts................................... $62,160

b
. Cash balance, beginning.......................... $ 6,000
Add cash receipts from sales...................  62,160
Total cash available.................................  68,160

Less disbursements:
Inventory purchases................................. 28,000
Selling and administrative expenses....... 40,000
Dividends................................................   4,000
Total disbursements.................................  72,000
Cash excess (deficiency)......................... (3,840)
Financing–borrowing..............................    8,840
 Cash balance, ending............................... $ 5,000
11. A sales budget is given below for one of the products manufactured by the Key Co.:

January................... 21,000 units

February................. 36,000 units
March..................... 61,000 units
April....................... 41,000 units
May........................ 31,000 units
June........................ 25,000 units

The inventory of finished goods at the end of each month should equal 20% of the next month's sales.
However, on December 31 the finished goods inventory totaled only 4,000 units.
Each unit of product requires three specialized electrical switches. Since the production of these
specialized switches by Key's suppliers is sometimes irregular, the company has a policy of maintaining
an ending inventory at the end of each month equal to 30% of the next month's production needs. This
requirement had been met on January 1 of the current year.

Required:
Prepare a budget showing the quantity of switches to be purchased each month for January, February,
and March and in total for the quarter.

Ans:
January February March April
Budgeted sales (units).................... 21,000 36,000 61,000 41,000
Add: Desired ending inventory......  7,200* 12,200  8,200  6,200
Total needs..................................... 28,200 48,200 69,200 47,200
Deduct: Beginning inventory.........  4,000  7,200 12,200  8,200*
Units to be produced...................... 24,200 41,000 57,000 39,000

January February March Quarter

Units to be produced 24,200 41,000 57,000 122,200
Switches per unit ×3 ×3 ×3 ×3
Production needs 72,600 123,000 171,000 366,600
Add: Desired ending inventory  36,900  51,300  35,100  35,100
109,50
Total needs 0 174,300 206,100 401,700
Deduct: Beginning inventory  21,780  36,900  51,300  21,780
Required purchases  87,720 137,400 154,800 379,920

Beginning inventory, January 1: 72,600 × 0.3 = 21,780

Ending inventory, March 31: (39,000 × 3) × 0.3 = 35,100

*36000x20%=7200
*41000x20%
 12. One quarter gram of a rare seasoning is required for each bottle of Dipping Oil, a very popular product
sold through gourmet shops that is produced by The Lucas Company. The cost of the seasoning is $16
per gram. Budgeted production of Dipping Oil is given below for the second quarter, and the first month
of the third quarter.

April May June July

8,00
Required production bottles........... 5,000 0 15,000 10,000

The seasoning is so difficult to get that the company must have on hand at the end of each month 20% of
the next month's production needs. A total of 250 grams will be on hand at the beginning of April.

Required:

Prepare a direct materials budget for the seasoning, by month and in total for the second quarter. Be sure
to include both the quantity to be purchased and its cost for each month.

Ans:
Lucas Company
Direct Materials Budget for the Second Quarter

April May June Total

Required production (bottles)............ 5,000 8,000 15,000 28,000
Seasoning required per bottle
(grams)........................................... ×0.25 ×0.25 ×0.25 ×0.25
Production needs (grams).................. 1,250 2,000 3,750 7,000
Add desired ending inventory of
seasoning........................................    400*    750    500    500
Total needs......................................... 1,650 2,750 4,250 7,500
Less beginning inventory of
seasoning........................................    250    400    750    250
Seasoning to be purchased (grams).... 1,400 2,350 3,500 7,250
Cost of seasoning per gram................ × $16 × $16 × $16 × $16
Cost of seasoning to be purchased..... $22,400 $37,600 $56,00 $116,000

*2000x20%