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:

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

		Debits		Credits
Cash	$	40,000
Accounts receivable		200,000
Inventory		57,750
Buildings and equipment (net)		350,000
Accounts payable			$	85,125
Common stock				500,000
Retained earnings				62,625
	$	647,750	$	647,750

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

December (actual)	$	250,000
January	$	385,000
February	$	582,000
March	$	296,000
April	$	193,000

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, $15,000 per month: advertising, $55,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,100 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 $1,000 cash. During March, other equipment will be purchased for cash at a cost of $70,000.

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

1)	Schedule of Expected cash collections
			January	Feburary	March	Quarter
Cash sales			77000	116400	59200	252600
Credit sales			200,000	308000	465600	973,600
total collections			277000	424400	524800	1226200
Accounts receivable at march 31= 296,000*80%=236800
2-a)		Merchandise purchase budget
			January	Feburary	March	Quarter		April
budgeted cost of goods sold			231000	349200	177600	757800		115800
Add:Ending inventory			87300	44400	28950	28,950
total needs			318300	393600	206550	786750
less Beginning inventory			57,750	87,300	44,400	57,750
Required purchases			260,550	306,300	162,150	729,000
2-b)	Schedule of Expected cash disbursement for Merchandise purchase
			January	Feburary	March	Quarter
December purchases			85,125			85,125
january purchases			130275	130275		260550
Feburary purchases				153150	153150	306300
march purchases					81075	81075
total cash disbursement for purchases			215,400	283425	234225	733,050
Accounts payable=		81,075
3)			Cash budget
			January	Feburary	March	Quarter
Beginning cash balance			40,000	30,800	54215	40,000
Add cash collections			277000	424400	524800	1226200
total cash available			317,000	455200	579015	1,266,200
less cash disbursements
purchase of inventory			215,400	283425	234225	733,050
selling and adm expense			100800	116560	93680	311040
purchase of equipment			0	1,000	70,000	71000
cash dividends			45,000	0	0	45,000
total cash disbursement			361,200	400985	397905	1,160,090
Excess(Deficiency) of cash			-44,200	54215	181110	106,110
Financing
Borrowings			75,000	0	0	75,000
Repayments			0	0	-75,000	-75000
interest			0	0	-2,250	-2250
total financing			75,000	0	-77250	-2,250
ending cash balance			30,800	54215	103860	103,860
	interest expense = 75000*1%*3
			2250
4)			income statememt
Sales						1263000
cost of goods sold
Beginning invnetory				57,750
Add purchases				729,000
cost of goods avaialble				786,750
less ending inventory				28,950		757,800
Gross profit						505,200
Selling and administrative exp
Salaries and wages				45,000
Advertising				165,000
shiiping 5% of sales				63150
other expense 3% of sales				37890
Depreciation				42,100		353,140
operating income						152,060
less interest expense						2,250
Net income						149,810
5)		Balance sheet
Asses
current assets
cash						103860
Account receivable						236,800
inventory						28,950
total current assets						369,610
buildings and Equipment (net)			(350000+1000+70000-42100)			378900
total assets						748,510
liabilities & stockholders Equity
current liabilities
Accounts payable						81,075
total current liabilities						81,075
Stockholders Equity
common stock						500,000
Retained earnings		(86,475+102830-45000)				167,435
total stockholders equity						667,435
total liabilities & stockholders equity						748,510