Justin's Plant Store, a Retailer, Started Operations on January 1

question 129

Multiple Choice

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: $\begin{array} { |l | r | } \hline & \text { Expected Sales } \\\hline \text { January } & \$ 10,000 \\\hline \text { February } & 24,000 \\\hline \text { March } & 16,000 \\\hline \text { April } & 25,000 \\\hline\end{array}$ 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 budgeted balance sheet,what would be the merchandise inventory on February 28?

• A) $3,200.
• B) $4,800.
• C) $7,500.
• D) $9,600.

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Definitions:

Inventory Cost

Inventory cost includes all costs associated with procuring, storing, and managing goods a business intends to sell.

Financing

The act of providing funds for business activities, making purchases or investing.

Shelf Life

The length of time for which an item remains usable, fit for consumption, or saleable.

Storage

The act of keeping or placing goods or data in a designated space for future use or retrieval.