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 $ 51,000 Accounts receivable 208,800 Inventory 59,400 Buildings and equipment (net) 361,000 Accounts payable $ 88,425 Common stock 500,000 Retained earnings 91,775 $ 680,200 $ 680,200 Actual sales for December and budgeted sales for the next four months are as follows: December(actual) $ 261,000 January $ 396,000 February $ 593,000 March $ 307,000 April $ 204,000 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. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) Monthly expenses are budgeted as follows: salaries and wages, $26,000 per month: advertising, $66,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $43,860 for the quarter. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold. 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. During February, the company will purchase a new copy machine for $2,100 cash. During March, other equipment will be purchased for cash at a cost of $75,500. During January, the company will declare and pay $45,000 in cash dividends. 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

Schedule of expected cash collection
	January	February	March	Quarter
Cash Sales	$        79,200.00	$    118,600.00	$      61,400.00	$      259,200.00
Credit Sales	$      208,800.00	$    316,800.00	$    474,400.00	$ 1,000,000.00
Total collection	$      288,000.00	$    435,400.00	$    535,800.00	$ 1,259,200.00

Merchandise Purchase Budget
	January	February	March	Quarter
Budgeted Cost on Goods sold	$      237,600.00	$    355,800.00	$    184,200.00	$      777,600.00
Add: Desired Inventory	$        88,950.00	$      46,050.00	$      30,600.00	$      165,600.00
Total Needed	$      326,550.00	$    401,850.00	$    214,800.00	$      943,200.00
Less: Beginning Inventory	$        59,400.00	$      88,950.00	$      46,050.00	$      194,400.00
Required Purchase	$      267,150.00	$    312,900.00	$    168,750.00	$      748,800.00

Schedule of Expected Cash Disbursement for Merchandise Purchase
	January	February	March	Quarter
December Purchase	$        88,425.00	$                     -	$                     -	$        88,425.00
January Purchase	$      133,575.00	$    133,575.00	$                     -	$      267,150.00
February Purchase	$                       -	$    156,450.00	$    156,450.00	$      312,900.00
March Purchase	$                       -	$                     -	$      84,375.00	$        84,375.00
Total Cash Disbursement for Purchases	$      222,000.00	$    290,025.00	$    240,825.00	$      752,850.00

Payment of December purchase is taken from closing balance of accounts payable in December.

Cash Budget
	January	February	March	Quarter
Beginning Cash Balance	$        51,000.00	$      30,320.00	$      34,155.00	$        51,000.00
Add: Cash Collections	$      288,000.00	$    435,400.00	$    535,800.00	$ 1,259,200.00
Total Cash Collection	$      339,000.00	$    465,720.00	$    569,955.00	$ 1,310,200.00
Less: Cash Disbursements
Inventory Purchases	$      222,000.00	$    290,025.00	$    240,825.00	$      752,850.00
Salaries and Wages	$        26,000.00	$      26,000.00	$      26,000.00	$        78,000.00
Advertisement	$        66,000.00	$      66,000.00	$      66,000.00	$      198,000.00
Shipping	$        19,800.00	$      29,650.00	$      15,350.00	$        64,800.00
Other Expenses	$        11,880.00	$      17,790.00	$        9,210.00	$        38,880.00
Equipment Purchase	$                       -	$        2,100.00	$      75,500.00	$        77,600.00
Cash Dividends	$        45,000.00	$                     -	$                     -	$        45,000.00
Total Cash Disbursement	$      390,680.00	$    431,565.00	$   432,885.00	$ 1,255,130.00
Excess (deficiency) of Cash	$      (51,680.00)	$      34,155.00	$    137,070.00	$        55,070.00
Financing:
Borrowings	$        82,000.00	$                     -	$                     -	$        82,000.00
Repayments	$                       -	$                     -	$      84,460.00	$        84,460.00
Interest	$              820.00	$            820.00	$            820.00	$         2,460.00
Total Financing	$        82,820.00	$            820.00	$    (83,640.00)	$                       -
Ending Cash Balance	$        30,320.00	$      34,155.00	$      52,610.00	$        52,610.00

Notes:
Interest is repaid at the end of quarter not at the end on every month.
Ending cash balance is calculated as follows
Excess (deficiency) of Cash	XXXXX
Add Borrowings	XXXXX
Less: repayments	(XXXXX)
	XXXXX

Hillyard Company
Income Statement
Sales	$ 1,296,000.00
Less Cost of Goods Sold	$      777,600.00
Gross Profit	$      518,400.00
Expenses
Operating Expenses
Salaries and Wages	$        78,000.00
Advertisement	$      198,000.00
Shipping Expense	$        64,800.00
Interest Expenses	$          2,460.00
Other Expenses	$        38,880.00
Depreciation	$        43,860.00
Total Operating Expenses	$      426,000.00
Net Profit	$        92,400.00

Hillyard Company
Balance sheet
Current Assets
Cash	$        52,610.00
Accounts Receivables	$      245,600.00
Inventory	$        30,600.00
Fixed assets
Building and Equipment   (net)	$      394,740.00
Total Assets	$      723,550.00
Liabilities and Shareholder’s equity
Current Liabilities
Accounts Payable	$        84,375.00
Shareholder’s Equity
Common Stock	$      500,000.00
Retained Earnings	$      139,175.00
Total Liabilities and Shareholder's equity	$      723,550.00