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	$	42,000
Accounts receivable		201,600
Inventory		58,050
Buildings and equipment (net)		352,000
Accounts payable			$	85,725
Common stock				500,000
Retained earnings				67,925
	$	653,650	$	653,650

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

December(actual)	$	252,000
January	$	387,000
February	$	584,000
March	$	298,000
April	$	195,000

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, $17,000 per month: advertising, $57,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,420 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 $1,200 cash. During March, other equipment will be purchased for cash at a cost of $71,000.

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:

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:
	December (actual)	January	February	March	Qtr
SALES	2,52,000	3,87,000	5,84,000	2,98,000	12,69,000
Cash sales collection -20 % OF MONTH		77400	116800	59600	2,53,800
Credit -Cash collection -80 % OF Previous Month		201600	309600	467200	9,78,400
Total Cash Collection		279000	426400	526800	12,32,200

2-a. Merchandise purchases budget:
	December (actual)	January	February	March	April	QTR = jan +Feb+march
SALES	2,52,000	3,87,000	5,84,000	2,98,000	1,95,000	12,69,000
Gorss margin - 40% of sales	100800	154800	233600	119200	78000	5,07,600
COGS = sales -Gross margin	1,51,200	2,32,200	3,50,400	1,78,800	1,17,000	7,61,400
ADD = desired clsoing inventory 25% of next month’s COGS	58050	87600	44700	29250	-	29,250
LESS = desired opening inventory 25% current months COGS	37800	58050	87600	44700	-	58,050
Purchase	1,71,450	2,61,750	3,07,500	1,63,350	-	7,32,600

2-b. Schedule of expected cash disbursements for merchandise purchases:
	December	January	February	March	QTR = jan +Feb+march
Purchase	1,71,450	2,61,750	3,07,500	1,63,350	7,32,600
cash paid -1/2 of the month -		130875	153750	81675	3,66,300
cash paid -1/2 of the previous month -		85725	130875	153750	3,70,350
Purchase		216600	284625	235425	736650

3. Cash budget:
	January	February	March	QTR = jan +Feb+march
Begining cash	42,000	30,440	50,295	42,000
Total Cash Collection	2,79,000	4,26,400	5,26,800	12,32,200
Total cash available (A)	3,21,000	4,56,840	5,77,095	12,74,200
Less
Purchase	2,16,600	2,84,625	2,35,425	7,36,650
Salaries and wages	17,000	17,000	17,000	51,000
advertising	57,000	57,000	57,000	1,71,000
shipping, 5% of sales	19,350	29,200	14,900	63,450
other expenses, 3% of sales	11,610	17,520	8,940	38,070
asset purchase	-	1,200	71,000	72,200
cash dividends	45,000	-	-	45,000
Total Cash paid (B)	3,66,560	4,06,545	4,04,265	11,77,370
Excess/ deficiency (C=A-B)	-45,560	50,295	1,72,830	96,830
Financing :
Borrowing (1)*	76,000	-	-	76,000
Repayment (2) **	-	-	76,000	76,000
Interest (3) (46000*1%*3months)	-	-	2,280	2,280
Total Financing (1-3-2)	76,000	-	-78,280	-2,280
Ending cash (C+total finacing)	30,440	50,295	94,550	94,550
* minimum balance 30000+ 46000 amt to cover defi. Of 45560
** amt of 76000 can be rapaid in march as we have excess of 172830

4. Prepare an absorption costing income statement for the quarter ending March 31
Sales of qtr		12,69,000
COGS
add : beg. Inventory	58,050
add : purchase	7,32,600
less : ending inventory	29,250	-7,61,400
Gross margin		5,07,600
Less : Selling and administrative expense
Salaries and wages	51,000
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