Question

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:

  

Current assets as of March 31:
Cash	$	8,700
Accounts receivable	$	24,800
Inventory	$	46,800
Building and equipment, net	$	116,400
Accounts payable	$	28,050
Capital stock	$	150,000
Retained earnings	$	18,650

  

a.	The gross margin is 25% of sales.
b.	Actual and budgeted sales data:

  

March (actual)	$62,000
April	$78,000
May	$83,000
June	$108,000
July	$59,000

  

c.	Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.
d.	Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold.
e.	One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.
f.	Monthly expenses are as follows: commissions, 12% of sales; rent, $3,500 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $873 per month (includes depreciation on new assets).
g.	Equipment costing $2,700 will be purchased for cash in April.
h.	Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. 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, up to a total loan balance of $20,000. 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.

1. Prepare an absorption costing income statement for the quarter ended June 30.

2. Prepare a balance ssheet as of June 30.

Answer 1

Shilow Company Absorption Costing Income Statement For the Quarter Ended June 30th
Sales		$269,000
Cost of Goods Sold:
Beginning Inventory	$46,800
Add purchases	190,350
Goods available for sale	$237,150
Ending Inventory	35,400	201,750
Gross Margin		$67,250
Selling & Administrative Expenses		59,793
Net Operating Income		$7,457
Less Interest Expense		(230)
Net Income		$7,227

Shillow Company Balance Sheet
Assets:
Current Assets:
Cash	$4,850
Accounts Receivable	43,200
Inventory	35,400	$83,450
Long-Term Assets:
Net Building and Equipment		118,227
Total Assets		$201,677
Equity:
Current Liabilities:
Accounts Payable		$25,800
Stockholders' Equity
Capital Stock	$150,000
Retained Earnings**	25,877	$175,877
Total Equity		$201,677
**Retained Earnings:
Beginning Balance	$18,650
Plus: Net Income	7,227
Ending Balance	$25,877

1

	March	April	May	June	Total
Total Sales	$62,000	$78,000	$83,000	$108,000	$331,000
Collections from:		April	May	June	Quarter
Cash Sales (60%)		$46,800	$49,800	$64,800	$161,400
Credit Sales (4 March April May June July Total Total Sales $62,000 $78,000 $83,000 $108,000 $59,000 $390,000 March April May June Quarter Budgeted COGS (75% of Sales) $46,500 $58,500 $62,250 $81,000 $201,750 Add desired EI (80% next COGS) 46,800 49,800 64,800 35,400 35,400 Total Needs $93,300 $108,300 $127,050 $116,400 $237,150 Less BI (80% of this month's COGS) 37,200 46,800 49,800 64,800 46,800 Purchases $56,100 $61,500 $77,250 $51,600 $190,350 $28,050		24,800	31,200	33,200	89,200
Schedule of expected cash disbursement for merchandise purchases: March April May June Quarter 50% paid in month of purchase $28,050 $30,750 $38,625 $25,800 $95,175 50% paid In month after purchase 28,050 30,750 38,625 97,425 Total $58,800 $69,375 $64,425 $192,600 April May June Quarter Commission $9,360 $9,960 $12,960 $32,280 Rent $3,500 $3,500 $3,500 $10,500 Other Expenses (6% of sales) $4,680 $4,980 $6,480 $16,140      Total Selling & Admin. $17,540 $18,440 $22,940 $58,920 Cash Budget April May June Quarter Cash balance, beginning $8,700 $4,260 $4,445 $8,700 Add cash collections 71,600 81,000 98,000 250,600 Total cash available $80,300 $85,260 $102,445 $259,300 Less disbursements:      Inventory purchases $58,800 $69,375 $64,425 $192,600      Selling & Administrative $17,540 $18,440 $22,940 $58,920      Equipment purchases $2,700 $2,700           Total disbursements $79,040 $87,815 $87,365 $254,220 Net Cash Inflow before Financing $1,260 ($2,555) $15,080 $5,080 Available for repayment $0 $0 $15,080 $5,080 Financing:      Borrowings $3,000 $7,000 $0 $10,000      Repayments $1,000 0 0 10,000 ($10,000)      Interest 1% 0 0 230 ($230)           Total Financing $3,000 $7,000 $10,230 $230 Cash balance, ending $4,260 $4,445 $4,850 $4,850 Desired minimum cash balance $4,000 $4,000 $4,000 $4,000 Excess Over Desired Minimum $260 $445 $850 $850		$71,600	$81,000	$98,000	$250,600