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

Cash	$	60,000
Accounts receivable		216,000
Inventory		60,750
Buildings and equipment (net)		370,000
Accounts payable			$	91,125
Common stock				500,000
Retained earnings				115,625
	$	706,750	$	706,750

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

December(actual)	$	270,000
January	$	405,000
February	$	602,000
March	$	317,000
April	$	213,000

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, $35,000 per month: advertising, $61,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,300 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 $3,000 cash. During March, other equipment will be purchased for cash at a cost of $80,000.

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

Ans-1- Preparing schedule of expected cash collections:

Schedule of Expected Cash Collections

	January ($)	February ($)	March ($)	Quarter ($)
Cash sales (Current month)	81,000	120,400	63,400	264,800
Crdeit sales (Previous month)	216,000	324,000	481,600	1,021,600
Total	297,000	444,400	545,000	1,286,400

Working Note:

Schedule of expected cash collection:

	December	January	February	March
Total sales	$270,000	$405,000	$602,000	$317,000
Cash sales (20%)	$54,000	$81,000	$120,400	$63,400
	($270,000*20%)	($405,000*20%)	($602,000*20%)	($317,000*20%)
Credit sales	$216,000	$324,000	$481,600	$253,600
	($270,000*80%)	($405,000*80%)	($602,000*80%)	($317,000*80%)

Ans-2-a- Preparing Merchandise purchases budget:

Merchandise Purchases Budget

	January ($)	February ($)	March ($)	Quarter ($)
Budgeted cost of goods sold	243,000	361,200	190,200	794,400
Add: Ending inventory	90,300	47,550	31,950	31,950
Total needs	333,300	408,750	222,150	826,350
Less: Beginning inventory	60,750	90,300	47,550	60,750
Required Purchases	272,550	318,450	174,600	765,600

Working Note:

Calculation of cost of goods sold and ending inventory:

	January ($)	February ($)	March ($)	April ($)
Total Sales	405,000	602,000	317,000	213,000
Cost of goods sold	243,000	361,200	190,200	127,800
(60% of sales)	(405,000*60%)	(602,000*60%)	(317,000*60%)	(213,000*60%)
Ending inventory	90,300	47,550	31,950
(25% of next month COGS)	(361,200*25%)	(190,200*25%)	(127,800*25%)

Ans-2-b- Preparing schedule of expected cash disbursements for merchandise purchases:

Schedule of Expected Cash Disbursements for Merchandise Purchases

	January($)	February ($)	March ($)	Quarter ($)
December purchases (Given accounts payable)	91,125			91,125
January purchases	136,275	136,275		272,550
February purchases		159,225	159,225	318,450
March purchases (50% of march purchase 174,600)			87,300	87,300
Total disbursement	227,400	295,500	246,525	769,425

Ans-3- Preparing cash budget

Hillyard Company

Cash Budget

	January ($)	February ($)	March ($)	Quarter ($)
Beginning cash balance	60,000	30,200	31,940	60,000
Add: Cash collections	297,000	444,400	545,000	1,286,400
Total cash	357,000	474,600	576,940	1,346.400
Less: Cash disbursements:
Purchase of inventory	227,400	295,500	246,525	769,425
Selling & adminitrative	128,400	144,160	121,360	393,920
Purchase of equipments		3,000	80,000	83,000
Cash dividends	45,000			45,000
Total cash disbursements	400,800	442,660	447,885	1,291,345
Excess/Deficiency	(43,800)	31,940	129,055	55,055
Financing
Borrowing	74,000		0	74,000
Repayment			74,000	74,000
Interest			2,220	2,220
Total Financing	74,000	0	0	74,000
Ending cash balance	30,200	31,940	52,835	52,835
minimum balance to be maintained	30,000	30,000	30,000	30,000

Working Note:

Calculation of administrative and selling expenses:

	January ($)	February ($)	March ($)	Quarter ($)
Salaries	35,000	35,000	35,000	105,000
Advertising	61,000	61,000	61,000	183,000
Shipping (5%0f sales)	20,250	30,100	15,850	66,200
Other (3% of sales)	12,150	18,060	9,510	39,720
Total	128,400	144,160	121,360	393.920

Calculation of interest:

74,000*1/100-740 *3 for three months january and february=2,220

Ans-4 Hillyard Company

Income Statement

For the Quarter Ended March, 31

Details	Amonut ($)	Amount ($)
Sales Revenue		1,324,000
Cost Of Goods Sold:
Beginning Inventory	60,750
Purchases	765,600
Ending Inventory	31,950
Total Cost of Goods Sold (beginning inventory+Purchases-ending inventory)		794,400
Gross Profit		529,600
Selling and Adminitratative Expenses:
Salaries	105,000
Advertising	183,000
Shipping	66,200
Other Expenses	39,720
Depreciation Expenses	45,300
Total Selling and Administrative Expenses		439,220
Income before interest expenses		90,380
Interest expenses		2,220
Income available to stockholders		88,160
Cash Dividends		45,000
Income to be transferredto retained earnings		43,160

Thus,the net income for the quarter ended March 31 is $43,160

Ans-5 Hillyard Company

Balance Sheet

As on March,31

Assets:
Current Assets
Cash	$52,835
Accounts Receivable (80%0f 317,000)	253,600
Inventory	31,950
Total Current Assets		338,385
Long Term assets:
Building and Equipment (net)	370,000
Add:Current year purchases	83,000
	453,000
Less: Current Year Depreciation	45,300	407,700
Total Assets		746,085
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable (50%of 174,600)	87,300	87,300
Stockholders' Equity:
Common Stock	500,000
Retaind Earnings:
Beginning balance	115,625
Add:Current year net income	43,160
Ending Balance	158,785
Total stockholders equity		658,785
Total liabilities and stockholders'equity		746,085