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	$	57,000
Accounts receivable		213,600
Inventory		60,300
Buildings and equipment (net)		367,000
Accounts payable			$	90,225
Common stock				500,000
Retained earnings				107,675
	$	697,900	$	697,900

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

December(actual)	$	267,000
January	$	402,000
February	$	599,000
March	$	314,000
April	$	210,000

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, $32,000 per month: advertising, $64,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,820 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 $2,700 cash. During March, other equipment will be purchased for cash at a cost of $78,500.

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

Solution 1
Schedule of expected cash collections
Particulars	January	February	March	Quarter
Budgeted Sales	402000	599000	314000	1315000
Cash Sale (20%)	80400	119800	62800	263000
Collection for credit sales	213600	321600	479200	1014400
Total Collections	294000	441400	542000	1277400

Solution 2a
Merchandise Purchase Budget
Particulars	January	February	March	Quarter
Budgeted Cost of Goods Sold (60% of Sales)	241200	359400	188400	789000
Add: Desired ending merchandise inventory (25% of next month COGS)	89850	47100	31500	31500
Total Needs	331050	406500	219900	820500
Less: Beginning inventory	60300	89850	47100	60300
Required purchases	270750	316650	172800	760200

Solution 2b
Schedule of expected cash disbursement
Merchandise Purchases
Particulars	January	February	March	Quarter
March Purchases	90225			90225
April Purchases	135375	135375		270750
May Purchases		158325	158325	316650
June Purchases			86400	86400
Total Disbursement	225600	293700	244725	764025

3)

Cash Budget - Hillyard company
Particulars	January	February	March	Quarter
Opening Cash balance	57000	30240	31320	57000
Add: Collection from customers	294000	441400	542000	1277400
Total Cash Available	351000	471640	573320	1334400
Less - Cash Disbursement:				0
For Inventory	225600	293700	244725	764025
For Selling and administrative Expenses	128160	143920	121120	393200
For Equipment		2700	78500	81200
For Cash Dividend	45000			45000
Total Cash disbursement	398760	440320	444345	1283425
Excess (deficiency) of cash available over disbursements	-47760	31320	128975	50975
Financing:				0
Borrowings	78000			78000
Repayments			-78000	-78000
Interest			-2340	-2340
Total Financing	78000		-80340	-2340
Ending cash balance	30240	31320	48635	48635

Working :

Schedule of expected cash disbursement
of Selling and Administrative expenses
Particulars	January	February	March	Quarter
Salaries and wages	32000	32000	32000	96000
Advertising	64000	64000	64000	192000
Shipping (5% of sales)	20100	29950	15700	65750
Other expenses (3% of sales)	12060	17970	9420	39450
Total Disbursement	128160	143920	121120	393200

Solution 4
Absorption costing income statement
Hillyard Company
for quarter ended March 31
Particulars	Amount ($)
Sales	1315000
less :Cost of goods sold (60%)	789000
Gross profit	526000
less Operating expenses:
Salaries and wages	96000
Advertising	192000
Shipping (5% of sales)	65750
Other expenses (3% of sales)	39450
Depreciation	44820
Total operating expenses	438020
Operating income	87980
Interest expense	2340
Net Income	85640

Solution 5
Hillyard Company
Balance Sheet
For March 31
Particulars	Amount ($)
Assets:
Cash	48635
Accounts receivables ($314000*80%)	251200
Inventory	31500
Building and equipment, net ($367000 +$2,700+ $78,500- $44820)	403380
Total Assets	734715
Liabilities and stockholder's Equity:
Accounts payable (172800*50%)	86400
Common Stock	500000
Retained Earnings ($107,675 + $85,640- $45000)	148315
Total liabilities and stockholders equity	734715