Exercise 4) Carly\'s Criters Company operates a gift shop at the local zoo. The
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Exercise 4) Carly's Criters Company operates a gift shop at the local zoo. The results of operations for the first quarter of 2018 are as follows: Sales Cost of Goods Sold Gross Margin Selling & Administrative Expenses(12.750 Operating Income Income Taxes Net Income $125,000 (S68.750) $56,250 $43,500 $13.920) Additional Information: 1. Asset accounts are cash, accounts receivable, inventory, and equipment (net). Accounts payable is the only liability account. Owner's equity accounts are common stock and retained eamings. Fifty-five percent of inventory purchases are paid in the quarter of purchase and 45 percent are paid in the following quarter. All other expenses, including taxes, are paid in the quarter incurred The cash balance at the end of quarter one is SS-888. Sales and cost of goods sold are expected to decrease by 12 percent in each of the next three quarters of the year Selling & Administrative expenses are expected to increase by $4,675 due to increases in advertising and salaries. All other expenses in this category are expected to remain constant. The balance in accounts receivable at the end of quarter one relates to sales made during the first quarter of 2018. Dividends of $905 are paid out during each quarter. Inventory purchases in the first quarter of 2018 are $44,440. The balance in accounts payable at the end of quarter one relates to purchases made during the first quarter of 2018. 2. 3· 4. 5. 6· 7. 8. 9 10. Selling & Administrative expense includes $985 of quarterly depreciation related to equipment 11. Inventory at the end of the first quarter is $64,670. The company plans on holding ending 12. Sixty-five percent of sales are collected in the quarter of sale and 35 percent are collected in the The equipment had a book value of $17,825 at the end of quarter one. inventory equal to 75 percent of subsequent quarter cost of goods. quarter following the sale. 13. Common stock at the end of quarter one is $80,568 and 14. The tax rate is expected to remain at 32 percent. retained earnings is $34,567 Reguired A. Prepare a budgeted income statement for the second quarter of 2018. B. Prepare a cash receipts & disbursements budget for the second quarter of 2018. C. Prepare a budgeted balance sheet as of the end of the second quarter of 2018. D. The company is discussing the possibility of opening a new store at a new zoo right at the beginning of the third quarter. This store would require cash payments of S15,000. Assuming the company wants a minimum cash balance of $40,000 at the beginning of the third quarter, can a new store be opened without obtaining additional funds? How much will they have to borrow or have left over?Explanation / Answer
A.
Budgeted Income Statement for the Second Quarter 2018
Particulars
Amount
Sales ($125,000 x 88%)
110,000
Cost of Goods Sold ($110000 x 55% x 88%)*
53,240
Gross Margin
56,760
Selling & Administration Expense **
17,425
Operating Income
39,335
Income Tax (32% x 39,335)
12,587
Net Income
26,748
NOTE: * Cost of goods sold is always calculated as percentage of sales. From the first quarter we can see that COGS is 55% of sales i.e. 68750/125000 = 55%. Since there is reduce in COGS by 12% in each quarter, we have taken 88% of COGS on sales for second quarter.
NOTE: **
Calculation of Selling & Administration Expense
Selling & Administration inclusive of Depreciation
12,750
Less: Depreciation
(985)
Selling & Administration exclusive of Depreciation
11,765
Increase in second quarter
4,675
Increased total expense (11,765 + 4,675)
16,440
Add: Depreciation
985
Total Selling & Admin Expense for Second Quarter
17,425
We have considered that Selling & Admin expenses are increased by $4,675 after first quarter and will remain constant at 17,425 for remaining three quarters. Otherwise, one can also assume that the $4675 will increase by equal amount of $4675 / 3 = 1558.33 each quarter.
B.
Cash Receipts and Disbursement Budget for second quarter 2018.
Particulars
Amount (in $)
Cash Receipts:
Sales collected for the first quarter ($125,000 x 35%)
43,750
Sales collected for second quarter ($110,000 x 65%)
71,500
Total Budgeted Cash Receipts ($43,750 + $71,500)
115,250
Cash Disbursements:
Cash paid for inventory purchase in first quarter ($44,440 x 45%)
19,998
Payment of Dividends
905
Selling & Administration Expenses exclusive of Depreciation
16,440
Income Tax
12,587
Cash paid for inventory purchase in second quarter (See Note Below)
13,040
Total Budgeted Cash Disbursements
62,970
Net Cash flows for the second quarter
52,280
NOTE: Calculation of Inventory purchase in Second Quarter
As per the question, second quarter closing inventory is equal to 75% of COGS of third quarter, therefore we are first required to calculate the same.
Sales of third quarter = $110,000 x 88% (Due to reduce of 12% in each quarter)
= $96,800.
COGS as percentage of sales = 55%.
COGS for the third quarter = $96,800 x 55% x 88%( Due to reduce of 12% in each quarter)
=$46851. Approx.
Closing Inventory for the second quarter = $46851 x 75% = $35,139 Approx.
Inventory Purchase for second Quarter = COGS of second quarter – Opening Inventory + Closing Inventory.
= $53,240 – $64,670 + $35,139 = $23,709.
Cash Paid for inventory Purchase = $23709 x 55% = $13,040 Approx.
Budgeted Income Statement for the Second Quarter 2018
Particulars
Amount
Sales ($125,000 x 88%)
110,000
Cost of Goods Sold ($110000 x 55% x 88%)*
53,240
Gross Margin
56,760
Selling & Administration Expense **
17,425
Operating Income
39,335
Income Tax (32% x 39,335)
12,587
Net Income
26,748
NOTE: * Cost of goods sold is always calculated as percentage of sales. From the first quarter we can see that COGS is 55% of sales i.e. 68750/125000 = 55%. Since there is reduce in COGS by 12% in each quarter, we have taken 88% of COGS on sales for second quarter.
NOTE: **
Calculation of Selling & Administration Expense
Selling & Administration inclusive of Depreciation
12,750
Less: Depreciation
(985)
Selling & Administration exclusive of Depreciation
11,765
Increase in second quarter
4,675
Increased total expense (11,765 + 4,675)
16,440
Add: Depreciation
985
Total Selling & Admin Expense for Second Quarter
17,425
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