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	$	59,000
Accounts receivable		215,200
Inventory		60,600
Buildings and equipment (net)		369,000
Accounts payable					$	90,825
Common stock						500,000
Retained earnings						112,975
	$	703,800			$	703,800

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

December(actual)	$	269,000
January	$	404,000
February	$	601,000
March	$	316,000
April	$	212,000

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, $34,000 per month: advertising, $62,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,140 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 $2,900 cash. During March, other equipment will be purchased for cash at a cost of $79,500.

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:

*$404,000 sales × 60% cost ratio = $242,400.

†$360,600 × 25% = $90,150.

  

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			80800	120200	63200	264200
Credit sales			215,200	323200	480800	1,019,200
total collections			296000	443400	544000	1283400
Accounts receivable at march 31= 316,000*80%=252800
2-a)		Merchandise purchase budget
			January	Feburary	March	Quarter		April
budgeted cost of goods sold			242400	360600	189600	792600		127200
Add:Ending inventory			90150	47400	31800	31,800
total needs			332550	408000	221400	824400
less Beginning inventory			60,600	90,150	47,400	60,600
Required purchases			271,950	317,850	174,000	763,800
2-b)	Schedule of Expected cash disbursement for Merchandise purchase
			January	Feburary	March	Quarter
December purchases			90,825			90,825
january purchases			135975	135975		271950
Feburary purchases				158925	158925	317850
march purchases					87000	87000
total cash disbursement for purchases			226,800	294900	245925	767,625
Accounts payable=		87,000
3)			Cash budget
			January	Feburary	March	Quarter
Beginning cash balance			59,000	30,880	32400	59,000
Add cash collections			296000	443400	544000	1283400
total cash available			355,000	474280	576400	1,342,400
less cash disbursements
purchase of inventory			226,800	294900	245925	767,625
selling and adm expense			128320	144080	121280	393680
purchase of equipment			0	2,900	79,500	82400
cash dividends			45,000	0	0	45,000
total cash disbursement			400,120	441880	446705	1,288,705
Excess(Deficiency) of cash			-45,120	32400	129695	53,695
Financing
Borrowings			76,000	0	0	76,000
Repayments			0	0	-76,000	-76000
interest			0	0	-2,280	-2280
total financing			76,000	0	-78280	-2,280
ending cash balance			30,880	32400	51415	51,415
	interest expense = 76000*1%*3
			2280
4)			income statememt
Sales						1321000
cost of goods sold
Beginning invnetory				60,600
Add purchases				763,800
cost of goods avaialble				824,400
less ending inventory				31,800		792,600
Gross profit						528,400
Selling and administrative exp
Salaries and wages				102,000
Advertising				186,000
shiiping 5% of sales				66050
other expense 3% of sales				39630
Depreciation				45,140		438,820
operating income						89,580
less interest expense						2,280
Net income						87,300
5)		Balance sheet
Asses
current assets
cash						51415
Account receivable						252,800
inventory						31,800
total current assets						336,015
buildings and Equipment (net)			(369000+2900+79500-45140			406260
total assets						742,275
liabilities & stockholders Equity
current liabilities
Accounts payable						87,000
total current liabilities						87,000
Stockholders Equity
common stock						500,000
Retained earnings		(112975+87300-45000)				155275
total stockholders equity						655,275
total liabilities & stockholders equity						742,275