Budgeted income before income taxes


Problem: Handy Hardware is a retail hardware store. Information about the store's operation follows.

a. November 20x1 sales amounted to $200,000

b. Sales are budgeted at $220,000 for December 20x1 and $200,000 for January 20x2.

c. Collections are expected to be 60 percent in the month of sale and 38 percent in the month following the sale. Two percent of sales are expected to be uncollectible. Bad debt expense is recognized monthly.

d. The store's gross margin is 25 percent of its sales revenue

e. A total of 80 percent of the merchandise for resale is purchased in the month prior to the month of sale, and 20 percent is purchased in the month of sale. Payment for merchandise is made in the following month of purchase.

f.Other monthly expenses paid in cash amount to $22,600

g. Annual depreciation is $216,000

The company's Balance Sheet as of November 30, 20x1, is a sfollows:

Handy Hardware Inc.
Balance Sheet
November 30, 20x1

Assets
Cash $22,000
A.R. (net of $3,500 allowance for uncollectible accounts 76,000
Inventory 140,000
Property, plant, and equipment (net of $590,000 accumulated) 862,000

Total Assets $1,100,000

Liabilities and Stockholder Equity
A.P. $162,000
Common Stock 795,000
Retained Earnings 143,000

Total Liabilities and Stockholder Equity $1,100,000

Compute the following

1. The budgeted cash collections for December 20x1

2. The budgeted income (lose) before income taxes for December 20x1

3. The projected balance in accounts payable on December 31, 20x1.

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Finance Basics: Budgeted income before income taxes
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