- Journalize each of the projected transactions.
- Prepare a projected statement of cost of goods sold for 1993, a projected income statement for1993, and a projected balance sheet as of December 31, 2993.
- Describe the principal differences between 1993 estimates and the 1992 figures as shown in Exhibits 1, 2, and 3. In what respects is 1993 performance expected to be better than 1992 performance, and in what respects is it expected to be worse?
PLease take note of the corrections!
Case 3: Fahning Manufacturing Company The management of Fahning Manufacturing Company annually prepared a budget of expected nancial operations for the ensuing calendar year. The completed budget provided information on all aspects of the coming year's operations. It included a projected balance sheet as of the end of the year and a projected income statement. The nal preparation of statements was accomplished only after careful integration of detailed computations submitted by each department. This was done to ensure that the operations of all departments were in balance with one another. For example, the nance department needed to base its schedules of loan transactions and of collections and disbursements on numbers that were dependent on manufacturing, purchasing, and selling expectations. The level of production would be geared to the forecasts of the sales department, and purchasing would be geared to the proposed manufacturing schedule. In short, it was necessary to integrate the estimates of each department and to revise them in terms of the overall effect on operations to arrive at a coordinated and protable plan of operations for the coming year. The budget statements ultimately derived from the adjusted estimated transactions would then serve the company as a reliable guide and measure of the coming year's operations. At the time the 1993 budget was being prepared, in November of 1992, projected 1992 nancial statements were compiled for use as a comparison with the budgeted gures. These 1992 statements were based on ten months' actual and two months' projected transactions. They appear as Exhibits 1, 2, and 3. Below is the summary of expected operations for the budget year 1993 as nally accepted: 1. Sales: All on credit, $2,562,000; sales returns and allowances, $19,200; sales discounts taken by customers (for prompt payment), $49,200. (The sales gure is net of expected bad debts.) 2. Purchases of goods and services: a. New assets: Purchased for cash: manufacturing plant and equipment, $144,000; prepaid manufacturing taxes and insurance, $78,000. Purchased on 60% credit: materials, $825,000; supplies, $66,000. b. Services used to convert materials into work in process, all purchased for cash: direct manufacturing labor, $198,000; social security taxes on labor, $49,200; power, heat, and light, $135,600. 0. Selling and administrative services purchased for cash: $522,000. 3. Conversion of assets into work in process: This appears as an increase in the cost of work in process and a decrease in the appropriate asset accounts. Depreciation of manufacturing building and equipment, $140,000; expiration of prepaid taxes and insurance, $52,800; supplies used in manufacturing, $61,200; materials put into process, $818,800. 4. Transfer of work in process to nished goods: This appears as an increase in nished goods and a decrease in work in process. Total cost accumulated on goods that have been completed and transferred to finished goods, $1,901,952. 5. Cost of nished goods sold to customers: $31,806, 624. 6. Financial transactions: a. $264,000, borrowed on notes payable to bank. b. Notes payable repaid, $300,000. 0. Cash payment to bank of $38,400 for interest on loans. 7. Cash receipts from customers on accounts receivable: $2,604,000. 8. Cash payments on liabilities: a. Payment of accounts payable, $788,400. 13. Payment on 1992 income tax, $9,000. 9. Estimated federal income tax on I 993 income: $5 8,000, of which $5,800 is estimated to be unpaid as of December 31, 1993. 10. Dividends declared for year and paid in cash: $36,000. This Summary presents the complete cycle of the Fahning Manufacturing Company's budgeted yearly operations from the purchase of goods and services through their various stages of conversion to completion of the nished product to the sale of this product. All costs and cash receipts and disbursements involved in this cycle are presented. Including the provision for federal income taxes and the payment of dividends. EXHIBIT 1 FAI-lNlNG MANUFACTURJNG COMPANY Projected Balance Sheet December 31, 1992 Assets Current assets: Cash and marketable securities Accounts receivable (net of allowance for doubtful accounts) Inventories: Materials $ 1 10,520 Work in process 172,200 Finished goods 257,040 Supplies 17,230 Prepaid taxes and insurance Total current assets Other assets: Manufacturing plant at cost 2,678,400 Less: Accumulated depreciation 907,200 Total assets Liabilities and Shareholders ' Equity Current liabilities: Accounts payable $ 185,760 Notes payable 288,340 Income taxes payable 9,000 Total current liabilities Shareholders ' equity: Capital stock 1,512,000 Retained earnings 829,560 s 113,440 311,760 557,040 66,720 1,053,960 1,771,200 $2,825,160 5 433,600 2,341,560 Total liabilities and shareholders' equity $2,825,160 EXHIBIT 2 FAHNING MANUFACTURING COMPANY Projected 1992 Statement of Cost of Goods Sold Finished goods inventory, 1/1/92 $ 218,820 Work in process inventory, 1/1/92 $ 137,760 Materials used 663,120 Plus: Factory expenses: Direct manufacturing labor 419,040 Factory overhead Indirect manufacturing labor $170,640 Power, heat, and light 1 16,760 Depreciation of plant 126,600 Social security taxes 42,120 Taxes and insurance, factory 46,320 Supplies 56,880 559,320 1,779,240 Less: Work in process inventory, 12/31/92 172,200 Cost of goods manufactured 1,607,040 1,825,320 Less: Finished goods inventory, 12/31/92 257,040 Cost of goods sold $1,568,280 EXHIBIT 3 FAHNING MANUFACTURING COMPANY Projected 1992 Income Statement Sales $2,295,600 Less: Sales returns and allowances $17,640 Sales discounts allowed 42,920 61,560 Net sales 2,234,040 Less: Cost of goods sold (per schedule) 1,568,280 Gross margin 665,760 Less: Selling and administrative expense 437,160 Operating income 228,600 Less: Interest expense 34,080 Income before federal income tax 194,520 Less: Estimated income tax expense 89,520 Net income 105,000
