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’s general ledger showed the following account balances:
Cash $ 40,000
Accounts receivable 200,000
Inventory 57,750
Buildings and equipment (net)350,000
Accounts payable $ 85,125
Common stock 500,000
Retained earnings 62,625
$ 647,750 $ 647,750
Actual sales for December and budgeted sales for the next four months are as follows:
December(actual) $ 250,000
January $ 385,000
February $ 582,000
March $ 296,000
April $ 193,000
c. 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.
d. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)
e. Monthly expenses are budgeted as follows: salaries and wages, $15,000 per month: advertising, $55,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,100 for the quarter.
f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.
g. 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.
h. During February, the company will purchase a new copy machine for $1,000 cash.
i. During March, other equipment will be purchased for cash at a cost of $70,000. During January, the company will declare and pay $45,000 in cash dividends.
j. 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:
.Prepare an absorption costing income statement for the quarter ending March 31.
Prepare a balance sheet as of March 31.

Answer 1

SALES BUDGET:	December	January	February	March	Quarter	April
Total sales	250000	385000	582000	296000	1263000	193000
Cash sales (20%)	50000	77000	116400	59200	252600	38600
Credit sales (80%)	200000	308000	465600	236800	1010400	154400
SCHEDULE OF EXPECTED CASH COLLECTIONS:		April	May	June	Quarter
Cash sales		77000	116400	59200	252600
Credit sales		200000	308000	465600	973600
Total collections		277000	424400	524800	1226200
MERCHANDISE PURCHASES BUDGET:
Budgeted cost of goods sold (60% of sales)		231000	349200	177600	757800	115800
Add: Desired ending inventory		87300	44400	28950	28950
Total needs		318300	393600	206550	786750
Less: Beginning inventory		57750	87300	44400	57750
Required purchases		260550	306300	162150	729000
SCHEDULE OF EXPECTED CASH DISBURSEMENTS-MERCHANDISE PURCHASES:
March purchases		85125			85125
April purchases		130275	130275		260550
May purchases			153150	153150	306300
June purchases				81075	81075
Total disbursements		215400	283425	234225	733050
CASH BUDGET:
Beginning cash balance		40000	30800	54215	40000
Add: Cash collections		277000	424400	524800	1226200
Total cash available		317000	455200	579015	1266200
Less: Cash disbursements
For inventory		215400	283425	234225	733050
For expenses (15000+55000+8% of sales)		100800	116560	93680	311040
Cash dividends		45000			45000
For Equipment			1000	70000	71000
Total cash disbursements		361200	400985	397905	1160090
Excess/(Deficiency of cash)		-44200	54215	181110	106110
Financing:
Borrowings		75000	0	0	75000
Repayments		0	0	75000	75000
Interest		0	0	2250	2250
Total financing		75000	0	-77250	-2250
Ending cash balance		30800	54215	103860	103860
INCOME STATEMENT:
Sales		1263000
COGS		757800
Gross profit		505200
Selling and administrative expenses:
Salaries and wages	45000
Advertising	165000
Shipping	63150
Other expenses	37890
Depreciation	42100	353140
Operating income		152060
Interest		2250
Net Income		149810
BALANCE SHEET:
ASSETS:
Current assets:
Cash	103860
Accounts receivable	236800
Inventory	28950	369610
Building & Equipment (net)		378900
Total assets		748510
TOTAL LIABILITIES & EQUITY:
Current liabilities:
Accounts payable	81075	81075
Stockholders' equity;
Common stock	500000
Retained earnings	167435	667435
Total liabilities & Equity		748510	0