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%u2019s general ledger showed the following account balances:

Cash $47,000
Accounts receivable $205,600
Inventory $58,800
Buildings and equipment, net $357,000
Accounts payable $87,225
Common stock $500,000
Retained earnings $81175

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

December $257,000

January $392,000,

February $589,000,

March $303,000

April $200,000.

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 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, $22,000 per month; advertising, $62,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $43,220 per quarter.

Each month ending inventory should equal 25% of the following month cost of goods sold.

One half of the month 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 $1,700 cash. During March, other equipment will be purchased for cash at a cost of $73,500.

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.

Schedule of expected cash collections

Schedule of Expected Cash Collections
	January	February	March	Quarter
Cash sales	$78,000			78,400
Credit sales	$205,000			205,600
Total Collections	$304,000	$0	$0	$284,000

Merchandise purchases budget:

Merchandise Purchases Budget
	January	February	March	Quarter
Budgeted Cost of Goods Sold	235,200*	$353,400
Add desired ending inventory	88,350**
Total needs	323,550	353,400	0	0
Less beginning inventory	58,800
Required purchases	264,750	353,400	$0	$0

*$392,000 sales x 60% cost ratio = $235,200
** $353,400 x 25% = $88,350

Schedule of Expected Cash Disbursements-Merchandise Purchases
	January	February	March	Quarter
December purchases	87,225			$87,225
January purchases	132,375	$132,375		$264,750
February purchases
March purchases
Total disbursements	$219,600	$132,375	$0	$351,975

Complete the following cash budget:

Cash Budget
	January	February	March	Quarter
Cash balance, beginning	$47,000
Add cash collections	$284,000
Total cash available	$331,000	0	0	0
Less cash disbursements
For inventory	$219,000
For selling and admin expenses	$115,360
For purchase of equipment	------
For cash dividends	$45,000
Total cash disbursements	$379,960	0	0	0
Excess (deficiency) of cash	($48,960)	0	0	0
Financing:
Borrowing
Repayments
Interests
Total Financing	0		0	0
Cash balance, ending	($48,960)	$0	$0	$0

Answer 1

1)	Schedule of Expected cash collections
			January	Feburary	March	Quarter
Cash sales			78400	117800	60600	256800
Credit sales			205,600	313600	471200	990,400
total collections			284000	431400	531800	1247200
Accounts receivable at march 31= 303,000*80%=242,400
2-a)		Merchandise purchase budget
			January	Feburary	March	Quarter		April
budgeted cost of goods sold			235200	353400	181800	770400		120000
Add:Ending inventory			88350	45450	30000	30,000
total needs			323550	398850	211800	800400
less Beginning inventory			58,800	88,350	45,450	58,800
Required purchases			264,750	310,500	166,350	741,600
2-b)	Schedule of Expected cash disbursement for Merchandise purchase
			January	Feburary	March	Quarter
December purchases			87,225			87,225
january purchases			132375	132375		264750
Feburary purchases				155250	155250	310500
march purchases					83175	83175
total cash disbursement for purchases			219,600	287625	238425	745,650
Accounts payable=		83,175
3)			Cash budget
			January	Feburary	March	Quarter
Beginning cash balance			47,000	30,040	40995	47,000
Add cash collections			284000	431400	531800	1247200
total cash available			331,000	461440	572795	1,294,200
less cash disbursements
purchase of inventory			219,600	287625	238425	745,650
selling and adm expense			115360	131120	108240	354720
purchase of equipment			0	1,700	73,500	75200
cash dividends			45,000	0	0	45,000
total cash disbursement			379,960	420445	420165	1,220,570
Excess(Deficiency) of cash			-48,960	40995	152630	73,630
Financing
Borrowings			79,000	0	0	79,000
Repayments			0	0	-79,000	-79000
interest			0	0	-2,370	-2370
total financing			79,000	0	-81370	-2,370
ending cash balance			30,040	40995	71260	71,260
	interest expense = 79000*1%*3
			2370
4)			income statememt
Sales						1284000
cost of goods sold
Beginning invnetory				58,800
Add purchases				741,600
cost of goods avaialble				800,400
less ending inventory				30,000		770,400
Gross profit						513,600
Selling and administrative exp
Salaries and wages				66,000
Advertising				186,000
shiiping 5% of sales				64200
other expense 3% of sales				38520
Depreciation				43,220		397,940
operating income						115,660
less interest expense						2,370
Net income						113,290
5)		Balance sheet
Asses
current assets
cash						71260
Account receivable						242,400
inventory						30,000
total current assets						343,660
buildings and Equipment (net)			(357000+1700+73500-43220)			388980
total assets						732,640
liabilities & stockholders Equity
current liabilities
Accounts payable						83,175
total current liabilities						83,175
Stockholders Equity
common stock						500,000
Retained earnings		(81,175+113290-45000)				149465
total stockholders equity						649,465
total liabilities & stockholders equity						732,640