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	$	48,000
Accounts receivable		206,400
Inventory		58,950
Buildings and equipment (net)		358,000
Accounts payable			$	87,525
Common stock				500,000
Retained earnings				83,825
	$	671,350	$	671,350
b. Actual sales for December and budgeted sales for the next four months are as follows: December(actual) $ 258,000 January $ 393,000 February $ 590,000 March $ 304,000 April $ 201,000 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, $23,000 per month: advertising, $63,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $43,380 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 $1,800 cash. During March, other equipment will be purchased for cash at a cost of $74,000. 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

Solution 1	Cash collections
	Particulars	Jan	Feb	Mar	Total
	Cash sales (20 % of total sales)	78600	118000	60800	257400
	Received from debtor (80 % of previous month sales)	206400	314400	472000	992800
	Total	285000	432400	532800	1250200
Solution 2 a	purchase budget
	Particulars	Jan	Feb	Mar	Total
	Closing stock (25% of next months sales*.60)	88500	45600	30150	164250
	Add: sales*.60	235800	354000	182400	772200
	Less: opening stock	58950	88500	45600	193050
	Purchases	265350	311100	166950	743400
Solution 2 b	Cash disbursements
	Particulars	Jan	Feb	Mar	Total
	Cash paymnets for purchase (1/2 of same month)	132675	155550	83475	371700
	(1/2 of previous month)	87525	132675	155550	375750
	Total	220200	288225	239025
Solution 3	Cash budget
	Particulars	Jan	Feb	Mar
	Opening Cash	48000	30360	39535
	Cash collections as per solution 1	285000	432400	532800
	Cash payments:
	Cash paid for purchases as per solution 2b	220200	288225	239025
	Salary & wages	23000	23000	23000
	advertising	63000	63000	63000
	Shipping 5% of sales	19650	29500	15200
	other exp 3% of sales	11790	17700	9120
	Copy machine	0	1800	0
	Other equipment	0	0	74000
	Dividend	45000	0	0
	Closing Cash	-49640	39535	148990
	Loan taken (as to maintain minimum balance of 30000)	80000	0	-80000
	Interest payment   (80000*1/100*2)	0	0	-1600
	Closing Cash after loan	30360	39535	68990
Solution 4	Income statement
	Particulars	Amount
	Sales (393000+590000+304000)	1287000
	Less: COGS (.60 of sales)	772200
	Gross profit	514800
	Less salary	69000
	Less: advertisement	189000
	less: Shipping 5% os sales	64350
	Less: Other exp 3% of sales	38610
	Less: depreciation	43380
	Less: interest exp	1600
	Profit	108860