1. The accounts receivable balance as of December 31, 2017 is P120,000.

This represents 40%

of the quarter’s sales that will be collected in the first quarter of 2018. Actual sales,
therefore, in the last quarter of 2017 is
120,000/40% = 300,000

2.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Sales 280,000 320,000 360,000 352,000 1,312,000
Less: Cost of Goods Sold
FG, beginning inventory 44,000 56,000 52,000 60,000 44,000
Add: Production Cost 192,000 200,000 224,000 200,000 816,000
Cost of goods available for sale 236,000 256,000 276,000 260,000 860,000
Less: FG, ending inventory 56,000 52,000 60,000 48,000 48,000
Cost of goods sold 180,000 204,000 216,000 212,000 812,000
Gross Income 100,000 116,000 144,000 140,000 500,000
Less: Operating expenses 64,000 68,000 72,000 76,000 280,000
Income before tax 36,000 48,000 72,000 64,000 220,000
Less: Tax (32%) 11,520 15,360 23,040 20,480 70,400
Net Income 24,480 32,640 48,960 43,520 149,600
3. Accordingly, there is a plan to pay dividends of P20,000 in June and again in December, or a
total of P40,000 during the year, if the year’s income is not less than P120,000.
From the budgeted income statement above, net income for the year is P149,600. So
dividends of P40,000 shall be paid.

4. Total production costs 816,000

Add: Total operating costs 280,000
Total production and operating costs 1,096,000
Less: Depreciation (44,000 +12,000) x 4 224,000
Cash disbursements for production cost and opex 872,000
 5.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Cash balance, beginning 76,000 208,000 212,480 301,120 76,000
Add: Receipts
Current quarter - 60% of
sales 224,000 192,000 216,000 211,200 843,200
Previous quarter - 40% 120,000 56,000 128,000 144,000 448,000
Total receipts 344,000 248,000 344,000 355,200 1,291,200
Total cash available 420,000 456,000 556,480 656,320 1,367,200
Less: Disbursements
Production cost, net of
depreciation of
44,000/quarter 148,000 156,000 180,000 156,000 640,000
Operating cost, net of
depreciation of
12,000/quarter 52,000 56,000 60,000 64,000 232,000
Dividends (June and
December)
20,000 20,000 40,000
Income tax 12,000 11,520 15,360 23,040 61,920
Total Disbursements 212,000 243,520 255,360 263,040 973,920
Cash balance, ending 208,000 212,480 301,120 393,280 393,280
6. Forty percent of quarter’s sales is to be collected in the following quarter. This will represent
the accounts receivable balance at the end of each quarter.
For the fourth quarter, budgeted sales is P352,000. Forty percent of this, or P140,800, is the
accounts receivable balance as of December 31, 2018.

7. The company uses JIT purchasing system for materials. Thus, it does not maintain inventory
for this item. The ending inventory balance of P48,000 is composed of finished goods only.

8. The provision for income tax in the fourth quarter will be paid in the first quarter of the
following year. This will therefore be the balance of income tax payable as of the end of the
year. From the income statement, the provision for income tax in the fourth quarter is
P20,480.

9. Retained earnings, beginning balance (from balance sheet) 168,000

Add: Budgeted net income, 2018 (from income statement) 149,600
Total 317,600
Less: Dividends paid 40,000
Retained earnings, end 277,600

10. Beginning balance, Plant and equipment 580,000

Less: Depreciation(44,000 + 12,000) x 4 224,000
 Plant and equipment, ending balance 356,000
11.
Budgeted Balance Sheet
December 31, 2018

Assets Liab and Equity

Cash 393,280 Income tax payable 20,480
Accounts Receivable 140,800
Inventory 48,000 Capital stock 640,000
Plant and equipment 356,000 Retained earnings 277,600
Total Assets 938,080 Total Liab and Equity 938,080
Practice Problem 2

a. Cash collections in March for Sales made in March only:

Cash Sales (560,000 x 20%) 112,000
Collections of credit sales in March (560,000 x 80% x 30%) 134,400
Total 246,400

b. Cash Sales, April (500,000 x 20%) 100,000

Collection of accounts receivable:
April credit sales (500,000 x 80% x 30%) 120,000
March credit sales (560,000 x 80% x 40%) 179,200
February credit sales (520,000 x 80% x 25%) 104,000
Total budgeted cash receipts in April 503,200

c. Cost of goods sold, February (520,000 x 40%) 208,000

Add: Ending inventory (560,000 x 40% x 30%) 67,200
Total 275,200
Less: Beginning inventory (520,000 x 40% x 30%) 62,400
Budgeted purchases during February 212,800
d. Fixed costs: Advertising (576,000/12) 48,000
Salaries (864,000/12) 72,000
Insurance – quarterly (192,000/4) 36,000
Property taxes – twice a year (192,000/2) 96,000
Total fixed costs 252,000
Variable operating costs incurred in March, payable in April (560,000 x 10%) 56,000
Total budgeted cash disbursements in April for operating expenses 308,000

e. Accounts payable arising from merchandise purchases is paid in the month following the
month of purchase. So, the cash disbursement to be made in April is for the merchandise
purchased in March:
Cost of goods sold, March (560,000 x 40%) 224,000
Add: Ending Inventory (500,000 x 40% x 30%) 60,000
Total 284,000
Less: Beginning Inventory (224,000 x 30%) 67,200
Budgeted March purchases to be paid in April 216,800
f. Cash balance, April 1 51,600
Add: Receipts 503,200
Total Cash Available 554,800
Less: Disbursements:
Merchandise purchases 216,800
Operating expenses 308,000
Budgeted cash balance, April 30 30,000
The I. M. Broke Co. has the following collection pattern for its accounts receivable:

40 percent in the month of sale

50 percent in the month following the sale
8 percent in the second month following the sale
2 percent uncollectible

The company has recent credit sales as follows:

April: P200,000
May: 420,000
June: 350,000

How much should the company expect to collect on its receivables in June?

ANSWER:
JUNE COLLECTIONS
From April sales: P200,000 × .08 P 16,000
From May sales: 420,000 × .50 210,000
From June sales: 350,000 × .40 140,000
Total P366,000
Unit costs of materials X, Y, and Z are respectively P4, P3, and P5. The Barnes Company has a policy
of maintaining its raw material inventories at 50 percent of the next month’s production needs.
Assuming that this policy is satisfied, prepare a material purchases budget for all three materials in
both pounds and pesos for January.

ANSWER:
Material X Purchases
Product A Product B Product C
Jan. Feb. Jan. Feb. Jan. Feb.
Prod. 9,750 9,500 11,250 11,500 11,000 8,500
× lbs. ×2 ×2 ×2 ×2 ×3 ×3
Tot. 19,500 19,000 22,500 23,000 33,000 25,500

Required EI (19,000 + 23,000 + 25,500) × .50 = 33,750

Needed: (19,500 + 22,500 + 33,000) = 75,000
Total raw material X needed: 108,750
Less: BI (75,000 × .50) (37,500 )
Material X to be purchased in January (pounds): 71,250
Multiply by cost of Material X per lb.: × P4
Budgeted Cost of Material X for January: P285,000
 Material Y Purchases
Product A Product B Product C
Jan. Feb. Jan. Feb. Jan. Feb.
Prod. 9,750 9,500 11,250 11,500 11,000 8,500
× lbs. ×3 ×3 ×1 ×1 ×2 ×2
Tot. 29,250 28,500 11,250 11,500 22,000 17,000

Required EI (28,500 + 11,500 + 17,000) × .50 = 28,500

Needed: (29,250 + 11,250 + 22,000) = 62,500
Total raw material Y needed: 91,000
Less BI (62,500 × .50) (31,250 )
Material Y to be purchased in January (pounds): 59,750
Multiply by cost of Material Y per lb.: × P3
Budgeted Cost of Material Y for January: P179,250

Material Z Purchases
 Product A Product B Product C
Jan. Feb. Jan. Feb. Jan. Feb.
Prod. 9,750 9,500 11,250 11,500 11,000 8,500
× lbs. ×2 ×2 ×2 ×2 ×2 ×2
Tot. 19,500 19,000 22,500 23,000 22,000 17,000

Required EI (19,000 + 23,000 + 17,000) × .50 = 29,500

Needed: (19,500 + 22,500 + 22,000) = 64,000
Total raw material Z needed: 93,500
Less BI (64,000 × .50) (32,000 )
Material Z to be purchased in January (pounds): 61,500
Multiply by cost of Material Z per lb.: ×5
Budgeted Cost of Material Z for January: P307,500
The budgeted cost of all materials to be purchased in
Jan. would be P285,000 + P179,250 + P307,500 = P771,750

Farr Music Inc. sells Baldwin pianos. The following information regarding operating costs has
been extracted from budgets of Farr Music for December of this year and the first few months of
next year:
 Dec. Jan. Feb. Mar.
Payroll P12,000 P13,000 P22,000 P16,000
Insurance 4,000 4,000 4,000 4,000
Rent 6,000 6,000 6,000 6,000
Depreciation 2,000 2,000 2,000 2,000
Taxes 1,200 1,400 2,300 2,000

In addition to the above operating costs, enough pianos are purchased each month to
maintain the inventory at 40 percent of the projected next month’s sales. The firm is
expected to be in compliance with this policy on December 1. Budgeted sales are:

Dec. Jan. Feb. Mar. Apr.

Budgeted sales in units: 40 45 60 50 40

The average cost of a piano is P500. Merchandise is paid for in the month following its
purchase. All other expenses are paid in the month in which they are incurred. Prepare a
budget of the cash disbursements for Farr Music Inc. for the first three months of next year.

First, prepare a purchases budget for December through March for the pianos.

ANSWER:
Dec. Jan. Feb. Mar.
Required ending inventory 18 24 20 16
 Projected sales 40 45 60 50
Total pianos needed 58 69 80 66
Less the beginning inventory (16) (18) (24) (20 )
Pianos to be purchased 42 51 56 46
× the cost of the piano × P500 × P500 × P500 × P500
Budgeted purchases P21,000 P25,500 P28,000 P23,000

Budgeted cash disbursements

Jan. Feb. Mar.
Payroll P13,000 P22,000 P16,000
Insurance 4,000 4,000 4,000
Rent 6,000 6,000 6,000
Taxes 1,400 2,300 2,000
Merchandise purchases 21,000 25,500 28,000
Total P45,400 P59,800 P56,000

The average cost of a piano is P500. Merchandise is paid for in the month following its purchase.
All other expenses are paid in the month in which they are incurred. On average, a piano sells for
P1,500. Of each sale, 40 percent of the sales price is collected in the month of sale. The balance
is collected in the month following the sale. Prepare a cash budget for the first three months of
next year. The beginning cash balance on January 1 is budgeted to be P50,000.
 ANSWER:
CASH BUDGET
FARR MUSIC INC.
Jan. Feb. Mar.
Beginning cash P50,000 P 67,600 P 84,300
Cash collections:
Dec. sales 36,000
Jan. sales 27,000 40,500
Feb. sales 36,000 54,000
Mar. Sales _______ _______ 30,000
Cash available 113,000 144,100 168,300
Less cash disb. (45,400) (59,800) (56,000 )
Ending cash P 67,600 P 84,300 P112,300

Flour International is in the building construction business. In 2002, it is expected that 40

percent of a month’s sales will be collected in cash, with the balance being collected the
following month. Of the purchases, 50 percent are paid the following month, 30 percent are paid
in two months, and the remaining 20 percent are paid during the month of purchase. The sales
force receives P2,000 a month base pay plus a 2 percent commission. Labor expenses are
 expected to be P4,000 a month. Other operating expenses are expected to run about P2,000 a
month, including P500 for depreciation. The ending cash balance for 2001 was P4,500.

Sales Purchases
2001—Actual
November P80,000 P70,000
December 90,000 80,000
2002—Budgeted
January 70,000 70,000
February 90,000 60,000
March 30,000 50,000

Required:
a. Prepare a cash budget and determine the projected ending cash balances for the
first three months of 2002.
b. Determine the months that the company would either borrow or invest cash.

a. 2001 2002
Nov. Dec. Jan. Feb. Mar.
Sales P80,000 P90,000 P70,000 P90,000 P30,000
Purchases 70,000 80,000 70,000 60,000 50,000
Cash Receipts: Jan. Feb. Mar.
 Beginning cash balance P 4,500 P 2,600 P 300
From current month sales P28,000 P36,000 P12,000
From prior month sales 54,000 42,000 54,000
Total cash receipts P82,000 P78,000 P66,000
Total cash available P86,500 P80,600 P66,300
Cash Disbursements:
From Purchases:
Current month @ 20% P14,000 P12,000 P10,000
From 1 mo. prior purchases @ 50% 40,000 35,000 30,000
From 2 mo. prior purchases @ 30% 21,000 24,000 21,000
Total payments on purchases P75,000 P71,000 P61,000
Labor expense 4,000 4,000 4,000
Sales salaries 2,000 2,000 2,000
Commissions @ 2% of sales 1,400 1,800 600
Other expenses exclude depr. (P500) 1,500 1,500 1,500
Total cash disbursements P83,900 P80,300 P69,100
Ending cash balance P 2,600 P 300 P (2,800 )

b. Borrow—March; invest—January and February