Question

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

Current assets as of March 31:
Cash	$	7,000
Accounts receivable	$	18,000
Inventory	$	36,600
Building and equipment, net	$	121,200
Accounts payable	$	21,675
Common stock	$	150,000
Retained earnings	$	11,125

1. The gross margin is 25% of sales.

2. Actual and budgeted sales data:

March (actual)	$	45,000
April	$	61,000
May	$	66,000
June	$	91,000
July	$	42,000

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, $1,800 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $909 per month (includes depreciation on new assets).

7. Equipment costing $1,000 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.

Required:

Using the preceding data:

1. Complete the schedule of expected cash collections.

2. Complete the merchandise purchases budget and the schedule of expected cash disbursements for merchandise purchases.

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. Schedule of expected cash collections

	April	May	June	Quarter
Budgeted Sales	61,000	66,000	91,000	218,000
Cash Sales	36,600	39,600	54,600	130,800
Collection for credit sales	18,000	24,400	26,400	68,800
Total Collections	54,600	64,000	81,000	199,600

2. Merchandise purchases budget

	April	May	June	Quarter
Budgeted COGS (75% of sales)	45,750	49,500	68,250	163,500
Add; Desired ending inventory	39,600	54,600	25,200	25,200
Total needs	85,350	104,100	93,450	188,700
Less: Opening inventory	(36,600)	(39,600)	(54,600)	(36,600)
Required purchases	48,750	64,500	38,850	152,100

Schedule of expected cash disbursements for merchandise purchases

	April	May	June	Quarter
March Purchases	21,675			21,675
April Purchases	24,375	24,375		48,750
May Purchases		32,250	32,250	64,500
June purchases			19,425	19,425
Total disbursement	46,050	56,625	51,675	154,350

3. Cash Budget

	April	May	June	Quarter
Opening cash balance	7,000	4,770	4,465	7,000
Add:: Collection from customers	54,600	64,000	81,000	199,600
Total cash available	61,600	68,770	85,465	206,600
Less: Cash disbursement
For inventory	46,050	56,625	51,675	154,350
For equipment	1000	0	0	1000
For expenses	12,780	13,680	18,180	44,640
Total cash disbursement	59,830	70,305	69,855	199,990
Excess/ (Deficiency) of cash available over disbursements	1,770	(1,535)	15,610	6,610
Financing:
Borrowing	3,000	6,000		9,000
Repayment			(9,000)	(9,000)
Interest			(210)*	(210)
Total financing	3,000	6,000	(9,210)	(210)
Ending cash balance	4,770	4,465	6,400	6,400

*(3,000 x 1% x 3months) + (6,000 x 1% x 2months) = 210

	April	May	June	Quarter
Commission	7,320	7,920	10,920	26,160
Rent	1800	1800	1800	5,400
Other expenses	3,660	3,960	5,460	13,080
Total	12,780	13,680	18,180	44,640

4.

Sales	218,000
Less: COGS	(163,500)
Gross profit	54,500
Operating expense:
Sales commission	(26,160)
Rent	(5,400)
Other expenses	(13,080)
Depreciation (909 x 3)	(2,727)
Total operating expenses	(47,367)
Operating income	7,133
Less: Interest expense	(210)
Net Income	6,923

5.

Assets
Cash	6,400
Accounts receivables [91,000 x 40%]	36,400
Inventory	25,200
Building and equipment [121,200 + 1,000 - 2,727]	119,473
Total assets	187,473
Liabilities and stockholders' Equity
Accounts payable	19,425
Common stock	150,000
Retained Earnings [11,125 + 6,923]	18,048
Total Liabilities and stockholders' Equity	187,473