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:

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: 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 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 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. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) 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. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold. 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. 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. During January, the company will declare and pay $45,000 in cash dividends. 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

Required Budgets are as computed below:

1
Hillyard Company
Schedule of expected Cash collections
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Sales	400,000	600,000	300,000	1,300,000
Cash sales	80,000	120,000	60,000	260,000
Credit Sales	224,000	320000	480000	1,024,000
Total collections	304,000	440,000	540,000	1,284,000
Account receivable for March sale (300,000*.8)	240,000

2a.
Hillyard Company
Merchandise Purchase Budget
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Budgeted Cost of goods sold (60% of sales)	240,000	360,000	180,000	780,000
Add: Desired Ending merchandise inventory (25% of next month COGS)	90,000	45,000	30,000	30,000
Total needs	330,000	405,000	210,000	810,000
Less: Beginning merchandise inventory	60,000	90,000	45,000	60,000
Required purchase	270,000	315,000	165,000	750,000
March Ending Inventory 200,000*.6*25%

2b.
Hillyard Company
Schedule of expected Cash payments
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
December Purchases (a)	$93,000			$93,000
January Purchases (b)	$135,000	$135,000		$270,000
February Purchases (c )		$157,500	$157,500	$315,000
March Purchases (d)			$82,500	$82,500
Total payments (a+b+c+d)	$228,000	$292,500	$240,000	$760,500

3
Hillyard Company
Cash Budget
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Cash balance, beginning	48,000	30,000	30,800	48,000
Add: Cash collections	$304,000	$440,000	$540,000	1,284,000
Total Cash available	$352,000	$470,000	$570,800	$1,332,000
Less: cash Disbursements
Purchase of inventory	$228,000	$292,500	$240,000	760,500
Operating Expenses	129,000	145,000	121,000	395,000
Purchase of equipment		1,700	84,500	86,200
Cash Dividend	45,000			45,000
Total disbursement	402,000	439,200	445,500	1,286,700
Cash surplus/Deficit	-50,000	30,800	125,300	45,300
Financing
Borrowing	80,000			80,000
Repayment			-80,000	-80,000
Interest			-2400	-2,400
Net cash from Financing	80,000	0	-82,400	-2,400
Budgeted ending cash balance	30,000	30,800	42,900	42,900

4
Hillyard Company
Budgeted Income Statement
For the quarter ended March 31
Particulars	Amount ($)	Amount ($)
Sales		1,300,000
Less: Cost of goods sold (60% of sales)		780,000
Gross margin		520,000
Less:
Depreciation	42,000
Salaries and wages	81,000
Advertising	210,000
Shipping Charges	65,000
Other expenses	39,000	437,000
Net Operating Income		83,000
Interest expense		2,400
Net Income		80,600

5
Hillyard Company
Budgeted balance Sheet
Mar-31
Assets
Current assets:
Cash	42,900
Accounts Receivable	240,000
Inventory	30,000
Total current assets	312,900
Building and Equipment
Building and Equipment Net (370,000+1,700+84,500-42,000)	414,200
Total assets	727,100
Liabilities and Stockholders' Equity
Accounts Payable	82,500
Common Stock	500,000
Retained earnings (109,000+80,600-45,000)	144,600
Total liabilities and stockholders' equity	727,100

Working for operating expenses:

	January	February	March
Salaries and wages	27,000	27,000	27,000
Advertising	70,000	70,000	70,000
Shipping Charges	20,000	30,000	15,000
Other expenses	12,000	18,000	9,000
Total operating expenses	129,000	145,000	121,000