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	$	56,000
Accounts receivable		212,800
Inventory		60,150
Buildings and equipment (net)		366,000
Accounts payable			$	89,925
Common stock				500,000
Retained earnings				105,025
	$	694,950	$	694,950

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

December(actual)	$	266,000
January	$	401,000
February	$	598,000
March	$	313,000
April	$	209,000

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, $31,000 per month: advertising, $65,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,660 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 $2,600 cash. During March, other equipment will be purchased for cash at a cost of $78,000.

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

1)	Schedule of Expected cash collections
			January	Feburary	March	Quarter
Cash sales			80200	119600	62600	262400
Credit sales			212,800	320800	478400	1,012,000
total collections			293000	440400	541000	1274400
Accounts receivable at march 31=313,000*80%=					250400
2-a)		Merchandise purchase budget
			January	Feburary	March	Quarter		April
budgeted cost of goods sold			240600	358800	187800	787200		125400
Add:Ending inventory			89700	46950	31350	31,350
total needs			330300	405750	219150	818550
less Beginning inventory			60,150	89,700	46,950	60,150
Required purchases			270,150	316,050	172,200	758,400
2-b)	Schedule of Expected cash disbursement for Merchandise purchase
			January	Feburary	March	Quarter
December purchases			89,925			89,925
january purchases			135075	135075		270150
Feburary purchases				158025	158025	316050
march purchases					86100	86100
total cash disbursement for purchases			225,000	293100	244125	762,225
Accounts payable=		86,100
3)			Cash budget
			January	Feburary	March	Quarter
Beginning cash balance			56,000	30,920	31780	56,000
Add cash collections			293000	440400	541000	1274400
total cash available			349,000	471320	572780	1,330,400
less cash disbursements
purchase of inventory			225,000	293100	244125	762,225
selling and adm expense			128080	143840	121040	392960
purchase of equipment			0	2,600	78,000	80600
cash dividends			45,000	0	0	45,000
total cash disbursement			398,080	439540	443165	1,280,785
Excess(Deficiency) of cash			-49,080	31780	129615	49,615
Financing
Borrowings			80,000	0	0	80,000
Repayments			0	0	-80,000	-80,000
interest			0	0	-2,400	-2400
total financing			80,000	0	-82400	-2,400
ending cash balance			30,920	31780	47215	47,215
	interest expense = 80000*1%*3
			2400
4)			income statememt
Sales						1312000
cost of goods sold
Beginning invnetory				60,150
Add purchases				758,400
cost of goods avaialble				818,550
less ending inventory				31,350		787,200
Gross profit						524,800
Selling and administrative exp
Salaries and wages				93,000
Advertising				195,000
shiiping 5% of sales				65600
other expense 3% of sales				39360
Depreciation				44,660		437,620
operating income						87,180
less interest expense						2,400
Net income						84,780
5)		Balance sheet
Asses
current assets
cash						47215
Account receivable						250,400
inventory						31,350
total current assets						328,965
buildings and Equipment (net)			(366000+2600+78000-44660)			401940
total assets						730,905
liabilities & stockholders Equity
current liabilities
Accounts payable						86,100
total current liabilities						86,100
Stockholders Equity
common stock						500,000
Retained earnings		(105,025+84,780-45000)				144,805
total stockholders equity						644,805
total liabilities & stockholders equity						730,905