Reference: 07-02
Justin's Plant Store, a Retailer, Started Operations on January

question 7

Multiple Choice

Reference: 07-02
Justin's Plant Store, a retailer, started operations on January 1. On that date, the only assets were $16,000 in cash and $3,500 in merchandise inventory. For purposes of budget preparation, assume that the company's cost of goods sold is 60% of sales. Expected sales for the first four months appear below. $$\begin{array} { | l | l | } \hline & \text { Expected Sales } \\\hline \text { January } & \$ 10,000 \\\hline \text { February } & 24,000 \\\hline \text { March } & 16,000 \\\hline \text { April } & 25,000 \\\hline\end{array}$$ The company desires that the merchandise inventory on hand at the end of each month be equal to 50% of the
next month's merchandise sales (stated at cost) . All purchases of merchandise inventory must be paid in the month of purchase. Sixty percent of all sales should be for cash; the balance will be on credit. Seventy-five percent of
the credit sales should be collected in the month following the month of sale, with the balance collected in the following month. Variable operating expenses should be 10% of sales and fixed expenses (all depreciation) should be $3,000 per month. Cash payments for the variable operating expenses are made during the month the expenses are incurred.
-In a budget of cash receipts for March, the total cash receipts would be:

• A)$17,800.
• B)$20,200.
• C)$8,200.
• D)$16,000.

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Definitions:

Raw Materials Inventory

The stock of basic materials that are used in the production process but have not yet been processed.

Raw Material Purchases

The cost associated with acquiring raw materials needed for production.

Credit Sales

Credit sales are transactions where the customer purchases goods or services on account, paying at a future date rather than at the time of purchase.

Finished Goods Inventory

The stock of completed products ready for sale but not yet sold at the end of an accounting period.