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:

	Debit				Credit
Cash	$	60,000
Accounts receivable		216,000
Inventory		60,750
Buildings and equipment (net)		370,000
Accounts payable					$	91,125
Common stock						500,000
Retained earnings						115,625
	$	706,750			$	706,750

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

December(actual)	$	270,000
January	$	405,000
February	$	602,000
March	$	317,000
April	$	213,000

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, $35,000 per month: advertising, $61,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,300 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 $3,000 cash. During March, other equipment will be purchased for cash at a cost of $80,000.

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:

*$405,000 sales × 60% cost ratio = $243,000.

†$361,200 × 25% = $90,300.

  

2-b. Schedule of expected cash disbursements for merchandise purchases:

3. Cash budget. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

4. Prepare an absorption costing income statement for the quarter ending March 31.

5. Prepare a balance sheet as of March 31.

Answer 1

	1)	Schedule of Expected cash collections
				January	Feburary	March	Quarter
	Cash sales			81000	120400	63400	264800
	Credit sales			216,000	324000	481600	1,021,600
	total collections			297000	444400	545000	1286400
	Accounts receivable at march 31= 317,000*80%=253600
	2-a)		Merchandise purchase budget
				January	Feburary	March	Quarter		April
	budgeted cost of goods sold			243000	361200	190200	794400		127800
	Add:Ending inventory			90300	47550	31950	31,950
	total needs			333300	408750	222150	826350
	less Beginning inventory			60,750	90,300	47,550	60,750
	Required purchases			272,550	318,450	174,600	765,600
	2-b)	Schedule of Expected cash disbursement for Merchandise purchase
				January	Feburary	March	Quarter
	December purchases			91,125			91,125
	january purchases			136275	136275		272550
	Feburary purchases				159225	159225	318450
	march purchases					87300	87300
	total cash disbursement for purchases			227,400	295500	246525	769,425
	Accounts payable=		87,300
	3)			Cash budget
				January	Feburary	March	Quarter
	Beginning cash balance			60,000	30,200	31940	60,000
	Add cash collections			297000	444400	545000	1286400
	total cash available			357,000	474600	576940	1,346,400
	less cash disbursements
	purchase of inventory			227,400	295500	246525	769,425
	selling and adm expense			128400	144160	121360	393920
	purchase of equipment			0	3,000	80,000	83000
	cash dividends			45,000	0	0	45,000
	total cash disbursement			400,800	442660	447885	1,291,345
	Excess(Deficiency) of cash			-43,800	31940	129055	55,055
	Financing
	Borrowings			74,000	0	0	74,000
	Repayments			0	0	-74,000	-74000
	interest			0	0	-2,220	-2220
	total financing			74,000	0	-76220	-2,220
	ending cash balance			30,200	31940	52835	52,835
		interest expense = 74000*1%*3
				2220
	4)			income statememt
	Sales						1324000
	cost of goods sold
	Beginning invnetory				60,750
	Add purchases				765,600
	cost of goods avaialble				826,350
	less ending inventory				31,950		794,400
	Gross profit						529,600
	Selling and administrative exp
	Salaries and wages				105,000
	Advertising				183,000
	shiiping 5% of sales				66200
	other expense 3% of sales				39720
	Depreciation				45,300		439,220
	operating income						90,380
	less interest expense						2,220
	Net income						88,160
	5)		Balance sheet
	Asses
	current assets
	cash						52835
	Account receivable						253,600
	inventory						31,950
	total current assets						338,385
	buildings and Equipment (net)			(370000+3000+80000-45300)			407700
	total assets						746,085
	liabilities & stockholders Equity
	current liabilities
	Accounts payable						87,300
	total current liabilities						87,300
	Stockholders Equity
	common stock						500,000
	Retained earnings		(115625+88160-45000				158785
	total stockholders equity						658,785
	total liabilities & stockholders equity						746,085