P22-52B Using sensitivity analysis
Learning Objective 5
1. Option 2 Feb. NI $1,531
Shaner Company prepared the following budgeted income statement for the first quarter of 2016:
Shaner Company is considering two options. Option 1 is to increase advertising by $900 per month.
Option 2 is to use better-quality materials in the manufacturing process. The better materials will
increase the cost of goods sold to 15% but will provide a better product at the same sales price. The
marketing manager projects either option will result in sales increases of 25% per month rather than
20%.
Requirements
1. Prepare budgeted income statements for both options, assuming January sales remain $5,000. Round
all calculations to the nearest dollar.
2. Which option should Shaner choose? Explain your reasoning.
SOLUTION
Requirement 1
Option 1:
SHANER COMPANY
Budgeted Income Statement
For the Quarter Ended March 31, 2016
January
February
March
Total
Sales Revenue (25% increase per month)
$7,813
Cost of Goods Sold (10% of sales)
Gross Profit
17,157
S&A Expenses ($2,500 + $900 advertising + 10% of sales)
12,106
Operating Income
Income Tax Expense (30% of operating income)
Net Income
$ 420
Option 2:
SHANER COMPANY
Budgeted Income Statement
For the Quarter Ended March 31, 2016
January
February
March
Total
$ 5,000
$ 6,250
$ 7,813
$ 19,063
$ 1,531
$ 2,352
$ 4,758
P22-52B, cont.
Requirement 2
If one of the two options is chosen, it would be Option 2 because net income for the quarter is expected
to be $1,222 higher than it is in Option 1 ($4,758 for Option 2 − $3,536 for Option 1).
P22A-53B Preparing an operating budget—sales budget; inventory, purchases and COGS
budget; and S&A expense budget
Learning Objective 6
Appendix 22A
2. May purchases $71,750
3. Apr. total S&A exp. $16,000
Watercooler Office Supply’s March 31, 2016, balance sheet follows:
The budget committee of Watercooler Office Supply has assembled the following data.
a. Sales in April are expected to be $140,000. Watercooler forecasts that monthly sales will increase
2% over April sales in May. June’s sales will increase by 4% over April sales. July sales will
increase 20% over April sales. Cash receipts are 80% in the month of the sale and 20% in the month
following the sale.
Requirements
1. Prepare Watercooler’s sales budget for April and May 2016. Round all amounts to the nearest dollar.
2. Prepare Watercooler’s inventory, purchases, and cost of goods sold budget for April and May.
3. Prepare Watercooler’s selling and administrative expense budget for April and May.
SOLUTION
Requirement 1
WATERCOOLER OFFICE SUPPLY
Sales Budget
Requirement 2
WATERCOOLER OFFICE SUPPLY
Inventory, Purchases, and Cost of Goods Sold Budget
For the Two Months Ended May 31, 2016
P22A-53B, cont.
Requirement 3
WATERCOOLER OFFICE SUPPLY
Selling and Administrative Expense Budget
For the Two Months Ended May 31, 2016
P22A-54B Preparing a financial budget—schedule of cash receipts, schedule of cash payments,
cash budget
Learning Objective 7
Appendix 22A
1. Feb. total cash recpts. $60,960
3. Feb. total pmts. for S&A exp. $13,018
Knight Company’s budget committee provides the following information:
Requirements
1. Prepare the schedule of cash receipts from customers for January and February 2016. Assume cash
receipts are 80% in the month of the sale and 20% in the month following the sale.
2. Prepare the schedule of cash payments for purchases for January and February 2016. Assume
purchases are paid 60% in the month of purchase and 40% in the month following the purchase.
3. Prepare the schedule of cash payments for selling and administrative expense for January and
February 2016. Assume 25% of the accrual for Salaries and Commissions Payable is for
commissions and 75% is for salaries. The December 31 balance will be paid in January. Salaries and
commissions are paid 30% in the month incurred and 70% in the following month. Rent and income
tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.
4. Prepare the cash budget for January and February. Assume no financing took place.
SOLUTION
Requirement 1
KNIGHT COMPANY
Budgeted Cash Receipts from Customers
For the Two Months Ended February 28, 2016
P22A-54B, cont.
Requirement 2
KNIGHT COMPANY
Budgeted Cash Payments for Purchases
For the Two Months Ended February 28, 2016
January
February
18,450
36,540
Total cash payments for purchases
Accounts Payable balance, February 28, 2016:
Requirement 3
KNIGHT COMPANY
Budgeted Cash Payments for Selling and Administrative Expenses
For the Two Months Ended February 28,2016
January
February
Total
Variable expenses:
70% of last month’s Commission Expense
$ 2,100
$2,100
30% of current month’s Commission Expense
Total payments for variable expenses
6,018
Fixed expenses:
70% of last month’s Salaries Expense
30% of current month’s Salaries Expense
Rent Expense
Total payments for fixed expenses
10,000
Total payments for selling and administrative expenses
$ 27,418
Salaries and Commissions Payable balance, February 28, 2016:
February Salaries and Commissions, ($7,000 + $3,060), 70% paid in March 2016
$7,042
P22A-54B, cont.
Requirement 4
KNIGHT COMPANY
Cash Budget
For the Two Months Ended February 28, 2016
January
February
Total
Beginning cash balance
$ 28,000
$ 43,910
68,000
60,960
96,000
36,090
30,510
14,400
13,018
52,090
45,128
$ 43,910
$ 59,742
P22A-55B Preparing a financial budget—budgeted income statement, balance sheet, and
statement of cash flows
Learning Objective 7
Appendix 22A
2. RE $75,040
3. Net cash OA $28,004
Green Company has the following post-closing trial balance on December 31, 2016:
The company’s accounting department has gathered the following budgeting information for the first
quarter of 2017:
Additional information:
Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid
amount.
Requirements
1. Prepare a budgeted income statement for the quarter ended March 31, 2017.
2. Prepare a budgeted balance sheet as of March 31, 2017.
3. Prepare a budgeted statement of cash flows for the quarter ended March 31, 2017.
SOLUTION
Requirement 1
GREEN COMPANY
Budgeted Income Statement
For the Quarter Ended March 31, 2017
Sales Revenue
$ 121,200
Cost of Goods Sold
60,600
Gross Profit
60,600
Selling and Administrative Expenses:
Sales Commissions
Salaries Expense
12,000
Rent Expense
Depreciation Expense
Insurance Expense
Total Selling and Administrative Expenses
25,460
Operating Income
35,140
Income Tax Expense
Net Income
P22A-55B, cont.
Requirement 2
GREEN COMPANY
Budgeted Balance Sheet
March 31, 2017
Assets
Current Assets:
Cash (from Statement of Cash Flows)
$ 51,004
Accounts Receivable (a)
18,360
Merchandise Inventory (b)
16,800
Prepaid Insurance (c)
Total Current Assets
Property, Plant, and Equipment:
Equipment and Fixtures
40,000
24,600
Total Assets
$ 111,964
Current Liabilities:
Accounts Payable (e)
$ 12,300
Salaries and Commissions Payable (f)
Total Liabilities
Stockholders’ Equity
Common Stock
21,000
Retained Earnings (g)
75,040
Total Stockholders’ Equity
96,040
Total Liabilities and Stockholders’ Equity
$ 111,964
(a)
Accounts Receivable: Dec. 31 balance + total sales – customer payments = $12,000 +
$121,200 – $114,840 = $18,360
(b)
(e)
Accounts Payable: Dec. 31 balance + purchases – payments = $11,000 + $60,900 – $59,600
= $12,300
$3,200 + $6,060 + $12,000 – $17,636 = $3,624
(g)
P22A-55B, cont.
Requirement 3
GREEN COMPANY
Budgeted Statement of Cash Flows
For the Quarter Ended March 31, 2017
Operating Activities:
Cash receipts from customers
$ 114,840
Cash payments for purchases
(59,600)
(23,236)
Cash payments for income taxes
Net cash provided by operating activities
Investing Activities:
Net cash provided by (used for) for investing activities
Financing Activities:
Net cash provided by (used for) financing activities
Net increase in cash
Cash balance, January 1, 2017
Cash balance, March 31, 2017
P22A-56B Completing a comprehensive budgeting problem—merchandising company
Learning Objectives 6, 7
Appendix 22A
6. Total cash pmts. $81,700
7. NI $4,300
True Printing Company of Baltimore has applied for a loan. Its bank has requested a budgeted balance
sheet at April 30, 2016, and a budgeted statement of cash flows for April. The March 31, 2016, balance
sheet follows: