Question

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

Current assets as of March 31:
Cash	$	8,900
Accounts receivable	$	25,600
Inventory	$	48,000
Building and equipment, net	$	111,600
Accounts payable	$	28,800
Common stock	$	150,000
Retained earnings	$	15,300

1. The gross margin is 25% of sales.

2. Actual and budgeted sales data:

March (actual)	$	64,000
April	$	80,000
May	$	85,000
June	$	110,000
July	$	61,000

3. 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.

4. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold.

5. 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.

6. Monthly expenses are as follows: commissions, 12% of sales; rent, $3,700 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $837 per month (includes depreciation on new assets).

7. Equipment costing $2,900 will be purchased for cash in April.

8. 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.

3. Complete the cash budget.

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

5. Prepare a balance sheet as of June 30.

Answer 1

1)			Shilow company
			Schedule of Expected cash collections
			April	May	June	Quarter
Cash sales			48000	51000	66000	165000
credit sales			25,600	32000	34000	91,600
total collections			73600	83000	100000	256600
	Accounts receivable = 110000*40%=				44000
2)			Merchandise purchase budget
			April	May	June	Quarter
Budgeted cost of goods sold			60000	63750	82500	206250
Add Desired ending inventory			51000	66000	36,600	36,600
total needs			111000	129750	119100	242850
less beginning inventory			48,000	51,000	66,000	48,000
Required purchases			63,000	78,750	53,100	194,850
3)		Schedule of Cash disbursements-Merchandise purhcase
			April	May	June	Quarter
March purchases			28,800			28,800
April purchases			31500	31,500		63000
May purchases				39375	39,375	78750
June purchases					26550	26550
total disbursements			60,300	70875	65925	197,100
4)			Cash budget
			April	May	June	Quarter
Beginning cash balance			8,900	4,200	4,325	8,900
Add Cash collectiosn			73600	83000	100000	256600
total cas h available			82,500	87,200	104,325	265,500
less cash disbursements
for inventory			60,300	70875	65925	197,100
for expenses			18100	19000	23500	60600
for equipment			2,900	0	0	2,900
total cash disbursements			81,300	89875	89425	260,600
Excess(Deficiency)of cash			1,200	-2,675	14,900	4,900
Financing:
Borrowings			3,000	7,000	0	10,000
Repayments			0		-10,000	-10,000
interest			0		-230	-230
total financing			1,000	7,000	-10230	-230
Ending cash balance			4,200	4,325	4,670	4,670
	interest = 3000*1%*3=			90
		7000*1%*2=		140
				230
5)			income statement
	Sales					275000
	cost of goods sold
	Beginning inventor				48,000
	Add purchases				194,850
	goods available for sale				242,850
	ending inventory				36,600	206,250
	Gross margin					68,750
	Selling and administrative expense
	commissions				33000
	rent		(3700*3)		11100
	Depreciation		(837*3)		2511
	other expenses				16500	63111
	net operating					5,639
	interest expense					230
	net income					5,409
		Balance sheet
		Assets
		current assets
		Cash					4,670
		Accounts receivable					44,000
		inventory					36,600
		total current assets					85,270
		Building And equipment ,net					111,989
		total Assets					197,259
		liabilities And stockholder 's Equity
		Accounts payable					26,550
		total current assets					26,550
		Stockholder's Equity
		Capital stock				150,000
		Retained earnings				20,709	170,709
		total liabilites & stockholders Equity					197,259