Here are condensed versions of Pontiac Convenience Store’s most recent income statement and balance sheet. Because the business is organized as a proprietorship, it pays no corporate income tax.
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Pontiac Convenience Store Income Statement Year Ended December 31, 20X2 |
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Sales |
$900,000 |
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Cost of sales |
700,000 |
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Gross profit |
200,000 |
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Operating expenses |
80,000 |
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Net income |
$120,000 |
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Pontiac Convenience Store Balance Sheet December 31, 20X2 |
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Assets |
Liabilities and Capital |
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Cash |
$ 70,000 |
Accounts payable |
$ 35,000 |
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Inventories |
35,000 |
Note payable |
280,000 |
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Land and buildings, net |
360,000 |
Total liabilities |
315,000 |
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Total assets |
$465,000 |
Owner, capital |
150,000 |
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Total liabilities and capital |
$465,000 |
The owner is budgeting for 20X3. She expects sales and cost of goods sold to increase by 8%. To meet customer demand for the increase in sales, ending inventory will need to be $50,000 at December 31, 20X3. The owner hopes to earn a net income of $160,000 next year.
Required
1. One of the most important decisions a manager makes is the amount of inventory to purchase. Compute the amount of inventory to purchase in 20X3.
2. Prepare the store’s budgeted income statement for 20X3 to reach the target net income of $160,000. To reach this goal, operating expenses must decrease by $24,000. (Challenge)