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ACCT 386 - Week 5 - Homework - Question 6

ACCT 386 - Week 5 - Homework - Question 6
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ACCT 386 - Week 5 - Homework - Question 6

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Question 6

Janus Products, Inc., is a merchandising company that sells binders, paper, and other school supplies. The company is planning its cash needs for the third quarter. In the past, Janus Products has had to borrow money during the third quarter to support peak sales of back-to-school materials, which occur during August. The following information has been assembled to assist in preparing a cash budget for the quarter:

a.

Budgeted monthly absorption costing income statements for July–October are as follows:

 

July

August

September

October

  Sales

$

50,000  

$

80,000  

$

60,000  

$

55,000  

  Cost of goods sold

 

21,000  

 

38,000  

 

27,000  

 

25,000  

 









  Gross margin

 

29,000  

 

42,000  

 

33,000  

 

30,000  

 









  Selling and administrative expenses:

 

 

 

 

 

 

 

 

       Selling expense

 

6800  

 

11,700  

 

8,100  

 

7,200  

       Administrative expense*

 

5,000  

 

7,100  

 

6,000  

 

5,300  

 









  Total selling and administrative expenses

 

11,800  

 

18,800  

 

14,100  

 

12,500  

 









  Net operating income

$

17,200  

$

23,200  

$

18,900  

$

17,500  

 


















*Includes $1,900 depreciation each month.

b.

Sales are 20% for cash and 80% on credit.

c.

Credit sales are collected over a three-month period with 15% collected in the month of sale, 70% in the month following sale, and 15% in the second month following sale. May sales totaled $26,000, and June sales totaled $32,000.

d.

Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable for inventory purchases at June 30 total $11,600.

e.

The company maintains its ending inventory levels at 80% of the cost of the merchandise to be sold in the following month. The merchandise inventory at June 30 is $4,200.

f.

Land costing $4,500 will be purchased in July.

g.

Dividends of $1,200 will be declared and paid in September.

h.

The cash balance on June 30 is $8,300; the company must maintain a cash balance of at least this amount at the end of each month.

i.

The company has an agreement with a local bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $46,000. 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.

The company's president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revises the cash collection and ending inventory assumptions as follows:

1.

Sales continue to be 20% for cash and 80% on credit. However, credit sales from July, August, and September are collected over a three-month period with 30% collected in the month of sale, 60% collected in the month following sale, and 10% in the second month following sale. Credit sales from May and June are collected during the third quarter using the collection percentages specified in the main section.

2.

The company maintains its ending inventory levels for July, August, and September at 20% of the cost of merchandise to be sold in the following month. The merchandise inventory at June 30 remains $4,200 and accounts payable for inventory purchases at June 30 remains $11,600.