Exhibit 18-10 Streamer Company sells float-tubes for recreational fly-fishing. A review of the company's historical operations shows that gross margin consistently averages 40% of sales. Company guidelines indicate that ending inventory at the end of any quarter should always be 25% of the next quarter's budgeted cost of goods sold. The expected sales for Streamer's next four quarters are shown below.

-Refer to Exhibit 18-10. If Streamer prepares a pro-forma income statement for the first quarter, what amount would be shown for purchases (assume the year end inventory balance is $120,000)?

Question

Exhibit 18-10 Streamer Company sells float-tubes for recreational fly-fishing. A review of the company's historical operations shows that gross margin consistently averages 40% of sales. Company guidelines indicate that ending inventory at the end of any quarter should always be 25% of the next quarter's budgeted cost of goods sold. The expected sales for Streamer's next four quarters are shown below.
 
-Refer to Exhibit 18-10. If Streamer prepares a pro-forma income statement for the first quarter, what amount would be shown for purchases (assume the year end inventory balance is $120,000)?

Quizplus · Accepted Answer

The budgeted cost of goods sold for the first quarter can be calculated as follows:

Budgeted COGS = Expected sales for Q2 x Gross margin + Ending inventory for Q1

Ending inventory for Q1 = 25% of budgeted COGS for Q2 = 25% x (1,300,000 x 0.4) = $130,000

Budgeted COGS for Q1 = (1,300,000 x 0.4) + 130,000 = $650,000

Since the ending inventory at the end of the year is given as $120,000, we can calculate the cost of goods sold for the year as follows:

Ending inventory for Q4 = $120,000

Ending inventory for Q3 = 25% of budgeted COGS for Q4 = 25% x (1,400,000 x 0.4) = $140,000

Budgeted COGS for Q4 = (1,400,000 x 0.4) + 140,000 - 120,000 = $680,000

Ending inventory for Q2 = 25% of budgeted COGS for Q3 = 25% x (1,300,000 x 0.4) = $130,000

Budgeted COGS for Q3 = (1,300,000 x 0.4) + 130,000 - 140,000 = $650,000

Ending inventory for Q1 = 25% of budgeted COGS for Q2 = 25% x (1,300,000 x 0.4) = $130,000

Budgeted COGS for Q2 = (1,300,000 x 0.4) + 130,000 - 130,000 = $520,000

Therefore, the total cost of goods sold for the year is:

$650,000 + $650,000 + $680,000 + $520,000 = $2,500,000

The cost of goods sold for the first quarter can be calculated as follows:

Cost of goods sold for Q1 = Budgeted COGS for Q1 - Ending inventory for Q1 = $650,000 - $130,000 = $520,000

However, purchases during the quarter will be different from cost of goods sold if there are beginning and ending inventory balances. We need additional information to determine purchases during the quarter.

Exhibit 18-10 Streamer Company Sells Float-Tubes for Recreational Fly-Fishing