Question

Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter:

1. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

Cash	$	48,000
Accounts receivable		224,000
Inventory		60,000
Buildings and equipment (net)		370,000
Accounts payable			$	93,000
Common stock				500,000
Retained earnings				109,000
	$	702,000	$	702,000

2. Actual sales for December and budgeted sales for the next four months are as follows:

December(actual)	$	280,000
January	$	400,000
February	$	600,000
March	$	300,000
April	$	200,000

3. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales.

4. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

5. Monthly expenses are budgeted as follows: salaries and wages, $27,000 per month: advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 for the quarter.

6. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.

7. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid in the following month.

8. During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500.

9. During January, the company will declare and pay $45,000 in cash dividends.

10. Management wants to maintain a minimum cash balance of $30,000. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required:

Using the data above, complete the following statements and schedules for the first quarter:

1. Schedule of expected cash collections:

2-a. Merchandise purchases budget:

2-b. Schedule of expected cash disbursements for merchandise purchases:

3. Cash budget:

4. Prepare an absorption costing income statement for the quarter ending March 31.

5. Prepare a balance sheet as of March 31.

Answer 1

Solution:
Hillyard Company
Sales Budget
For the Quarter ended March 31
			January	February	March	Quarter
Budgeted Sales in Dollars			400000	600000	300000	1300000
Total Budgeted Sales			400000	600000	300000	1300000
Hillyard Company
Expected Cash Collection
For the Quarter ended March 31
			January	February	March	Quarter
Account Receivable 12/31(80% of 280000)			224000			224000
January- Sales
20%	of	400000	80000			80000
80%	of	400000		320000		320000
February- Sales
20%	of	600000		120000		120000
80%	of	600000			480000	480000
March - Sales
20%	of	300000			60000	60000
Total Cash Collection			304000	440000	540000	1284000
Hillyard Company
Inventory Purchase Budget
For the Quarter ended March 31
			January	February	March	Quarter
Budgeted Cost of Goods Sold(60% of Sales)			240000	360000	180000	780000
			90000	45000	30000	30000
Total Needs			330000	405000	210000	810000
Less: Beginning Inventory			60000	90000	45000	60000
Required Inventory Purchase			270000	315000	165000	750000
30000 = 200000 x 0.6 x 0.25
Hillyard Company
Cash Disbursement for Purchase
For the Quarter ended March 31
			January	February	March	Quarter
December Purchase			93000			93000
January Purchase(50% 0f 270000)			135000	135000		270000
February Purchase(50% 315000)				157500	157500	315000
March Purchase(50% of 165000)					82500	82500
Total cash Disbursement for Purchase			228000	292500	240000	760500
*Account Payable of December - for Purchase Tk88150 will be paid in January
Hillyard Company
Cash Disbursement for operating Expenses
For the Quarter ended March 31
			January	February	March	Quarter
Salaries and Wages			27000	27000	27000	81000
Advertising			70000	70000	70000	210000
Shipping (5% of Sales)			20000	30000	15000	65000
Other Expenses(3% of Sales)			12000	18000	9000	39000
Total Cash Disbursement			129000	145000	121000	395000
Hillyard Company
Cash Budget
For the Quarter ended March 31
			January	February	March	Quarter
Beginning Cash Balance			48000	30000	30800	48000
Add: Cash Collection			304000	440000	540000	1284000
Total Cash Available			352000	470000	570800	1332000
Less: Cash Disbursement
	Inventory Purchase		228000	292500	240000	760500
	Operating Expense		129000	145000	121000	395000
	Equipment Purchase		0	1700	84500	86200
	Cash Dividend		45000	0	0	45000
Total Cash Disbursement			402000	439200	445500	1286700
Excess/Deficiency			-50000	30800	125300	45300
Financing:
	Borrowing		80000			80000
	Repayments		0		-80000	-80000
	Interest(80000*1%*3)		0		-2400	-2400
Total Financing			80000	0	-82400	-2400
Ending Cash Balance			30000	30800	42900	42900
Hillyard Company
Budgeted Income Statement
For the Quarter ended March 31
		Sales		1300000
		Less:	Cost of Goods Sold	780000
		Gross Margin		520000
		Less:	Operating Expenses	395000
			Depreciation	42000
		Operating Income		83000
		Less:	Interest Expense	2400
		Net Income		80600
Hillyard Company
Budgeted Balance Sheet
For the Quarter ended March 31
	Current Assets
		Cash			42900
		Account Receivable(80% of 300000)			240000
		Inventory			30000
	Total Current Assets				312900
	Building and Equipment				414200
	(Beginning 370000+New purchase 86200-Depreciation 42000)
	Total Assets				727100
	Liabilities and Equity
		Account Payable(50% of 165000)			82500
	Equity:
		Common Stock			500000
		Retained Earnings:
			Beginning	109000
		add:	Net Income	80600
			Total	189600
		Less:	Cash Dividend	45000	144600
	Total Liability and Equity				727100