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:

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

a) Schedule for Expected Cash Collection
	Jan	Feb	March	quarter
Cash Sales	$77,000	$116,400	$59,200	$252,600
Credit Sales (A/R,80% of Jan, 80% of Feb)	$200,000	$308,000	$465,600	$973,600
Total collection	$277,000	$424,400	$524,800	$1,226,200
Actual sales for December and budgeted sales for the next four months are as follows:
			20% Cash	80% credit
Dec-17		$250,000		$250,000
Jan-18		$385,000	$77,000	$308,000
Feb-18		$582,000	$116,400	$465,600
Mar-18		$296,000	$59,200	$236,800
Apr-18		$193,000	$38,600	$154,400
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.
b)
Hillyard Company
Merchandise Purchase Budget
	January	February	March	Quarter
Budgeted Cost of Goods Sold(60% of Sales)	$231,000	$349,200	$177,600	$757,800
Add: Desired Ending Inventory(25% of Next Month's COGS)	$87,300	$44,400	$28,950	$28,950
Total Needs	$318,300	$393,600	$206,550	$786,750
Less: Beginning Inventory	$57,750	$87,300	$44,400	$57,750
Required Inventory Purchase	$260,550	$306,300	$162,150	$729,000
Desired ending inventory march = $193,000 x 60% x 25%	$28,950
Jan. Beginning Inventory (given)
Hillyard Company
Cash Disbursement for Purchase
For the Quarter ended March 30
	January	February	March	Quarter
December Purchase	$85,125			$85,125
January Purchase(50% 0f 260,550)	$130,275	$130,275		$260,550
February Purchase(50% 306,300)		$153,150	$153,150	$306,300
March Purchase(50% of 162150)			$81,075	$81,075
Total cash Disbursement for Purchase	$215,400	$283,425	$234,225	$733,050
*Account Payable of December for Purchase $85,125 will be paid in January
Hillyard Company
Cash Disbursement for operating Expenses
For the Quarter ended March 30,2011
	January	February	March	Quarter
Salaries and Wages	$15,000	$15,000	$15,000	$45,000
Advertising	$55,000	$55,000	$55,000	$165,000
Shipping (5% of Sales)	$19,250	$29,100	$14,800	$63,150
Other Expenses(3% of Sales)	$11,550	$17,460	$8,880	$37,890
Total Cash Disbursement	$100,800	$116,560	$93,680	$311,040
Hillyard Company
Cash Budget
For the Quarter ended March 30,2011
	January	February	March	Quarter
Beginning Cash Balance	40000	30000	$53,415	48000
Add: Cash Collection	$277,000	$424,400	$524,800	$1,226,200
Total Cash Available	$317,000	$454,400	$578,215	$1,274,200
Less: Cash Disbursement
Inventory Purchase	$215,400	$283,425	$234,225	$733,050
Operating Expense	$100,800	$116,560	$93,680	$311,040
Equipment Purchase	0	1000	70000	71000
Cash Dividend	45000	0	0	45000
Total Cash Disbursement	$361,200	$400,985	$397,905	$1,160,090
Excess/Deficiency	-$44,200	$53,415	$180,310	$114,110
Financing:
Borrowing	74200			74200
Repayments	0		-74200	-74200
Interest(74200*12%*3/12)	0		-2226	-2226
Total Financing	74200	0	-76426	-2226
Ending Cash Balance	$30,000	$53,415	$103,884	$111,884