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	$	56,000
Accounts receivable		212,800
Inventory		60,150
Buildings and equipment (net)		366,000
Accounts payable			$	89,925
Common stock				500,000
Retained earnings				105,025
	$	694,950	$	694,950

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

December(actual)	$	266,000
January	$	401,000
February	$	598,000
March	$	313,000
April	$	209,000

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, $31,000 per month: advertising, $65,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,660 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 $2,600 cash. During March, other equipment will be purchased for cash at a cost of $78,000.
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:

Answer 1

1. Schedule of expected cash collections

Schedule of Expected Cash Collections
	January	February	March	Quarter
Cash sales	(401000*20%)= $80200	(598000*20%)= $119600	(313000*20%)= $62600	$262400
Credit sales	212800	(401000*80%)= 320800	(598000*80%)= 478400	1012000
Total collections	$293000	$440400	$541000	$1274400

2-a. Merchandise purchases budget

Merchandise Purchases Budget
	January	February	March	Quarter
Budgeted cost of goods sold	$240600	$358800	$187800	$787200
Add Desired ending inventory	89700	46950	31350	31350
Total needs	330300	405750	219150	818550
Less Beginning inventory	(60150)	(89700)	(46950)	(60150)
Units to be purchased	$270150	$316050	$172200	$758400

Calculation of Budgeted cost of goods sold

January= $401000*60%= $240600

February= $598000*60%= $358800

March= $313000*60%= $187800

Calculation of Desired ending inventory

January= $358800*25%= $89700

February= $187800*25%= $46950

March= $209000*60%*25%= $31350

2-b. Schedule of expected cash disbursements for merchandise purchases

Schedule of Expected Cash Disbursements for Merchandise Purchases
	January	February	March	Quarter
December purchases	$89925	-	-	$89925
January purchases	(270150*1/2)= 135075	(270150*1/2)= 135075	-	270150
February purchases	-	(316050*1/2)= 158025	(316050*1/2)= 158025	316050
March purchases	-	-	(172200*1/2)= 86100	86100
Total cash disbursements for purchases	$225000	$293100	$244125	$762225

3. Cash budget

Cash Budget
	January	February	March	Quarter
Beginning cash balance	$56000	$30000	$30860	$56000
Add: Collections from customers	293000	440400	541000	1274400
Total cash available	349000	470400	571860	1330400
Less: Cash disbursements:
Inventory purchases	225000	293100	244125	762225
Selling and administrative expenses	128080	143840	121040	392960
Equipment purchases	-	2600	78000	80600
Cash dividends	45000	-	-	45000
Total cash disbursements	398080	439540	443165	1280785
Excess (deficiency) of cash	(49080)	30860	128695	49615
Financing:
Borrowings	79080	-	-	79080
Repayments	-	-	(79080)	(79080)
Interest	-	-	(2372)	(2372)
Total financing	79080	-	(81452)	(2372)
Ending cash balance	$30000	$30860	$47243	$47243

Borrowing in January= Deficiency of Cash+Minimum cash balance required

= $49080+30000= $79080

Selling and administrative expenses in January= Salaries and wages+Advertising+Shipping+Other expenses

= $31000+65000+(401000*5%)+(401000*3%)= $128080

Selling and administrative expenses in February= $31000+65000+(598000*5%)+(598000*3%)= $143840

Selling and administrative expenses in March= $31000+65000+(313000*5%)+(313000*3%)= $121040

Interest= $79080*1%*3= $2372

January to March= 3 months