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:

Cash	$	43,000
Accounts receivable		202,400
Inventory		58,200
Buildings and equipment (net)		353,000
Accounts payable			$	86,025
Common stock				500,000
Retained earnings				70,575
	$	656,600	$	656,600

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

December(actual)	$	253,000
January	$	388,000
February	$	585,000
March	$	299,000
April	$	196,000

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, $18,000 per month: advertising, $58,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,580 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 $1,300 cash. During March, other equipment will be purchased for cash at a cost of $71,500.

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

1)	Schedule of Expected cash collections
			January	Feburary	March	Quarter
Cash sales			77600	117000	59800	254400
Credit sales			202,400	310400	468000	980,800
total collections			280000	427400	527800	1235200
2-a)		Merchandise purchase budget
			January	Feburary	March	Quarter		April
budgeted cost of goods sold			232800	351000	179400	763200		117600
Add:Ending inventory			87750	44850	29400	29,400
total needs			320550	395850	208800	792600
less Beginning inventory			58,200	87,750	44,850	58,200
Required purchases			262,350	308,100	163,950	734,400
2-b)	Schedule of Expected cash disbursement for Merchandise purchase
			January	Feburary	March	Quarter
December purchases			86,025			86,025
january purchases			131175	131175		262350
Feburary purchases				154050	154050	308100
march purchases					81975	81975
total cash disbursement for purchases			217,200	285225	236025	738,450
3)			Cash budget
			January	Feburary	March	Quarter
Beginning cash balance			43,000	30,760	48835	43,000
Add cash collections			280000	427400	527800	1235200
total cash available			323,000	458160	576635	1,278,200
less cash disbursements
purchase of inventory			217,200	285225	236025	738,450
selling and adm expense			107040	122800	99920	329760
purchase of equipment			0	1,300	71,500	72800
cash dividends			45,000	0	0	45,000
total cash disbursement			369,240	409325	407445	1,186,010
Excess(Deficiency) of cash			-46,240	48835	169190	92,190
Financing
Borrowings			77,000	0	0	77,000
Repayments			0	0	-77,000	-77000
interest			0	0	-2,310	-2310
total financing			77,000	0	-79310	-2,310
ending cash balance			30,760	48835	89880	89,880
	interest expense = 77000*1%*3
			2310
4)			income statememt
Sales						1272000
cost of goods sold
Beginning invnetory				58,200
Add purchases				734,400
cost of goods avaialble				792,600
less ending inventory				29,400		763,200
Gross profit						508,800
Selling and administrative exp
Salaries and wages				54,000
Advertising				174,000
shiiping 5% of sales				63600
other expense 3% of sales				38160
Depreciation				42,580		372,340
operating income						136,460
less interest expense						2,310
Net income						134,150
5)		Balance sheet
Asses
current assets
cash						89880
Account receivable						239,200
inventory						29,400
total current assets						358,480
buildings and Equipment (net)						383,220
total assets						741,700
liabilities & stockholders Equity
current liabilities
Accounts payable						81,975
total current liabilities						81,975
Stockholders Equity
common stock						500,000
Retained earnings						159,725
total stockholders equity						659,725
total liabilities & stockholders equity						741,700