Ricky’s Convenience Stores’ income statement for the year ended December 31, 2020, and its balance sheet as of December 31, 2020, are as follows: 

The business is organized as a proprietorship, so it pays no corporate income tax. The owner is budgeting for 2021 and expects sales and cost of goods sold to increase by 7%. To meet customer demand, ending inventory will need to be $80,000 at December 31, 2021. The owner hopes to earn a net income of $152,000 next year. 

Requirements

1. One of the most important decisions a manager makes is the amount of inventory to purchase. Show how to determine the amount of inventory to purchase in 2021.

2. Prepare the store’s budgeted income statement for 2021 to reach the target net income of $152,000. To reach this goal, operating expenses must decrease by $10,480.

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A1 Ricky's Convenience Stores Income Statement 1 Year Ended December 31, 2020 2 Sales 3 Cost of sales Gross profit 4 5 Operating expenses 6 Net income 7 $ 955,000 719,000 236,000 111,000 $ 125,000 1 2 3 A1 Ricky's Convenience Stores Balance Sheet December 31, 2020 Assets 6 7 8 9 Cash Inventories 4 5 Land and buildings, net Total assets Liabilities and Capital $ 39,000 Accounts payable 67,000 Note payable Total liabilities 265,000 Owner, capital Total liabilities and capital $ 371,000 $ 30,000 195,000 225,000 146,000 $ 371,000