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:

 

		Debits		Credits
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

Hillyard Company

Sales Budget

For the Quarter ended march 31

	Jan	Feb	Mar	Quarter
Budegtee Sales in dollars	$400,000	$600,000	$300,000	$1,300,000
Total Budgeted Sales	$400,000	$600,000	$300,000	$1,300,000

Hillyard Company

Expected Cash Collection

For the Quarter ended march 31

	Jan	Feb	Mar	Quarter
Account receivable 12/31(80%of $280,000)	$224,000			$224,000
January Sales
20% of 400,000	$80,000			$80,000
80% of $400,000		$320,000		$320,000
February Sales
20% of $600,000		$120,000		$120,000
80% of $600,000			$480,000	$480,000
March Sales
20% of $300,000			$60,000	$60,000
Total Cash Collection	$304,000	$440,000	$540,000	$1,284,000

Hillyard Company

Inventory Purchase Budget

For the Quarter ended march 31

	Jan	Feb	Mar	Quarter
Budgeted COGS(60% of Sales)	$240,000	$360,000	$180,000	$780,000
Add:-Ending Inventory(25% of next month's COGS)	$90,000	$45,000	$30,000	$30,000
Total	$330,000	$405,000	$210,000	$810,000
Less:- Beg Inventory	$60,000	$90,000	$45,000	$60,000
Required inventory purchase	$270,000	$315,000	$165,000	$750,000

Hillyard Company

Cash disbursement for Purchase

For the Quarter ended march 31

	Jan	Feb	Mar	Quarter
Dec Purchase	$93,000			$93,000
Jan Purchase(50% of $270,000)	$135,000	$135,000		$270,000
Feb purchase(50% of $315,000)		$157,500	$157,500	$315,000
March Purchase(50% of 165,000)			$82,500	$82,500
total Cash Disbursement for purchase	$228,000	$292,500	$240,000	$760,500

Hillyard Company

Cash disbursement for Expenses

For the Quarter ended march 31

	Jan	Feb	Mar	Quarter
Salaries and Wages	$27,000	$27,000	$27,000	$81,000
Advertising	$70,000	$70,000	$70,000	210,000
Shipping(5% of sales)	$20,000	$30,000	$15,000	$65,000
Other expenses(3% of sales)	$12,000	$18,000	$9,000	$39,000
Total Cash disbursement for expenses	$129,000	$145,000	$121,000	$395,000

Hillyard Company

Cash Budget

For the Quarter ended march 31

	Jan	Feb	Mar	Quarter
Beg Cash Balance	$48,000	$30,000	$30,800	$48,000
Add: Cash Collection	$304,000	$440,000	$540,000	$1,284,000
Total Cash Available	$352,000	$470,000	$570,800	$1,332,000
Less: Cash Disbursement
Inventory Purchase	$228,000	$292,500	$240,000	$760,500
Operating expense	$129,000	$145,000	$121,000	$395,000
Equipment Purchase	0	$1,700	$84,500	$86,200
Cash Dividend	$45,000	0	0	$45,000
Total Cash Disbursement	$402,000	$439,200	$445,000	$1,286,700
Excess/Deficiency	($50,000)	$30,800	$125,300	$45,300
Financing:
Borrowing	$80,000			$80,000
Repayments	0		($80,000)	($80,000)
Interest(80,000*12%*3/12)	0	0	($2,400)	($2,400)
Total Financing	$80,000	0	($82,400)	($2,400)
Ending Cash balance	$30,000	$30,800	$42,900	$42,900

Hillyard Company

Budgeted Income Statement

For the Quarter ended march 31

Sales		$1,300,000
Less	COGS	$780,000
Gross Margin		$520,000
Less	Operating Expenses	$395,000
	Depreciation	$42,000
Operating income		$83,000
Less	interest expense	$2,400
Net income		$80,600

Hillyard Company

Budgeted Balance Sheet

For the Quarter ended march 31

Current Assets
Cash	$42,900
Accounts Receivable(80% of $300,000)	$240,000
Inventory	$ 30,000
Total Current Assets	$312,900
Building and Equipment( Beg 370,000+New purchase $86,200-Dep $42,000)	$414,200
Total Assets	$727,100
Liabilities and Equity
Accounts payble(50% of $165,000)	$82,500
Equity
Common Stock	$500,000
Retained earning:
Beginning                         $109,000
Add net income                $80,600
Total                                $189,600
Add : Cash Dividend       $   45,000	$144,600
Total Liabilities and Equity	$727,100