MID-TERM EXAM # 1A
Dr. Jeff Power
ANSWER ALL QUESTIONS IN THE SPACE PROVIDED (Back of page if necessary)
DO NOT SEPARATE THE PAGES OF THE EXAM.
YOU HAVE 75 MINUTES TO COMPLETE THE EXAM
SHOW ALL OF YOUR CALCULATIONS FOR POSSIBLE PART MARKS
Problem #1 (35 points)
The Kelly Company is a retail sporting goods store. Facts regarding their operation are as follows:
Sales are budgeted at $220,000 for November and $200,000 for December.
All sales are on credit. Accounts receivable are expected to be collected 60% in the month of the sale, 38% in the
month following the sale, and 2% are expected to be uncollectible.
The cost of goods sold is typically 75% of sales.
Purchases of merchandise to be sold in the store are typically made 80% in the month prior to the sale and 20% in
the month of the sale. Payment for purchases is made in the month following the purchase.
Other cash expenses amount to $22,600 per month.
Depreciation expenses average $18,000 per month (all related to selling and administrative).
The company maintains inventory at 80% of next month’s needs.
The Kelly Company’s tax rate is 25%.
As of October 31, 1999
Allowance for bad debts
Fixed assets (at cost)
Total liabilities and
Calculate the budgeted cash collections for November.
Collections in November should equal the cash collections from November sales plus collections from accounts
receivable. Collections are 60% in the month of sale and the remainder in the month following the sale less any
bad debts. Therefore collections in November are expected to be:
$220,000 * .6 (current month) + $80,000 - $4,000 (prior months) = $208,000
Calculate the budgeted Net Income for November.
Cost of sales (75%)
Bad debt expense (220,000*0.02)
Net income (before tax)
Calculate the projected balance in accounts payable as of November 30.
Since the company pays for all purchases in the month following the purchase the balance in accounts payable at
the end of November would be equal to the amount of purchases made during November. The cost of sales is 75%
of revenue and purchases are made 80% in the month prior to sale and 20% of the current month’s sales.