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

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. 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 selling and administrative expenses should be 10% of sales and fixed expenses (all depreciation) should be $3,000 per month. Cash payments for the variable selling and administrative expenses are made during the month the expenses are incurred.
-In a budgeted income statement for the month of February, net income would be:

A) $9,000
B) $1,800
C) $0
D) $4,200

Correct Answer:

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