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Selected Exercises in preparation of Question 1 on

BA 6601 (Section 9) Compressive Exam

QUESTION 1

MERCY COMPANY produces a single product; product X. In February 2011, The company’smanagement is concerning preparation of the company’s master budget for next month (march 2011) to

 plan its profit.

The company’s management predicts sales for March 2011  and April 2011 will be $42,000 and $48,000,respectively.

Product X are purchased to resell at a markup of 60% of cost.

Starting from March 2011 onward, 70% of the sales are cash sales. The credit sales should be collected inthe following manners :

  60% collected in the month of sale  40% collected in the next month

On 1 March 2011, the company has balance of accounts receivable of $5,460. No uncollectible amount isestimated.

To be a cushion against short of product X available for sale, the management planned to maintain balance of inventory of product X at the end of each month at 20% of next month’s cost of goods sold.

On 1 March 2011, the company has balance of inventory (Product X) of $12,960

All Product X purchases are made on credit and due within 10 days after purchased. This mean that two-third (2/3) of the amount purchases in March 2011 is due in March 2011 and remaining one-third (1/3) ofamount purchases in March 2011 is due in April 2011.

On 1 March 2011, the company has balance of accounts payable of $5,000 which is due in March 2011 inentirety

The following selling general and administrative (SG&A) expenses are expected to incur in March 2011 :

Salaries $ 5,800Utilities 750Rent (prepayment) 3,000Gasoline 500Advertising (prepayment) 1,200

Depreciation 1,500

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QUESTION 2

Mrs. Angela runs a children toy shop named ENJOY COMPANY. In July 2010, she is in process of preparing her company’s first cash budget to make liquidity planning.

She predicts sales for August 2010 and September 2010 will be $35,000 and $28,000, respectively.

All toys are purchased to resell at a markup of 80% of cost.

Starting from August 2010 onward, 40% of the sales are cash sales. The credit sales should be collectedin the following manners :

  70% collected in the month of sale  28% collected in the next month  2% is estimated to be uncollectible in the month of sale

On 1 August 2010, customers owe the shop $350 for sales made in June 2010 and $3,150 for sales madein July 2010 (Balance of accounts receivable as at 1 August is $350 + $3,150 = $3,500). Angela estimatedin August 2010 that the balance of receivables of $350 resulting from credit sales in June 2010 willentirely go uncollected and all balance of receivables of $3,150 from credit sales in July 2010 willentirely be collected in August 2010.

To be a cushion against short of toys available for sale, she planned to maintain balance of inventory of

toys at the end of each month equal to 20% of next month’s cost of goods sold.

The toys purchases for July are $13,125. All toys purchases are made on credit and due within 10 daysafter purchased. This mean that approximately two-third (2/3) of each month’s purchases are paid for inthe month of purchases and one-third (1/3) of each month’s purchases are paid for in the month after the

 purchases were made.

On 1 August 2010, the company has balance of accounts payable of $3,850 whereby payments tosuppliers are due in August in entirety

The following selling general and administrative (SG&A) expenses are expected to incur in August 2010

:

Salaries $ 2,800Utilities 875Rent (prepayment) 5,250Gasoline 350Advertising (prepayment) 875Depreciation 1,200Bad debt ?

Salaries and gasoline are paid for when the expense is incurred. Utilities are paid for in the following

month (the July utility bill was $787). Three-month rent was prepaid on 1 July 2010 . On 1 August 2010,an advance of $1,750 was given to an advertising agency for 2 months of promotion.The cash balance as at 1 August 2010 is $2,625.

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 Required   :  Fill all necessary numbers out in the ANSWER SHEET FOR QUESTION 2 

 provided.