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: a. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances: Cash $ 43,000 Accounts receivable 202,400 Inventory 58,200 Buildings and equipment (net) 353,000 Accounts payable $ 86,025 Common stock 500,000 Retained earnings 70,575 $ 656,600 $ 656,600 b. Actual sales for December and budgeted sales for the next four months are as follows: December(actual) $253,000 January $388,000 February $585,000 March $299,000 April $196,000 c. 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. d. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) e. Monthly expenses are budgeted as follows: salaries and wages, $18,000 per month: advertising, $58,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,580 for the quarter. f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold. g. 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. h. During February, the company will purchase a new copy machine for $1,300 cash. During March, other equipment will be purchased for cash at a cost of $71,500. i. During January, the company will declare and pay $45,000 in cash dividends. j. 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: *$388,000 sales × 60% cost ratio = $232,800. †$351,000 × 25% = $87,750. 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.)

Answer 1

Ans-1 Schedule of expected cash collections

	January	February	March	Quarter
Cash Sales	$77,600 (388,000*20%)	117,000 (585,000*20%)	59,800 (299,000*20%)	254,400
Credit Sales	$202,400 (253,000*80%)	310,400 (388,000*80%)	468,000(585,000*80%)	980,800
Total Collections	$280,000	$427,400	$527,800	$1,235,200

2- a-Mechandise Purchases Budget

	January	February	March	Quarter
Budgeted Cost of Goods Sold	$232,800*	$351,000 (585,000*60%)	$ 179,400 (299,000*60%)	763,200
Add- Desired ending inventory	$87,750	$44,850 (179,400*25%)	$29,400 (196,000*60% = 117,600, 117,600*25%=29,400)	162,000
Total needs	$320,550	$395,850	$208,800	925,200
Less- Beginning inventory	$58,200	$ 87,750	$44,850	190,800
Required purchases	$262,350	$308,100	$163,950	$734,400

* $388,000 sales *60%cost ratio= $232,800

**$351,000*25%=$87,750

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

	January ($)	February ($)	March ($)	Quarter ($)
December purchases	86,025			86,025
January purchases	131,175 (50% of 262,350)	131,175 (50% of 262,350)		262,350
February purchases		154,050 (50% of 308,100)	154,050 (50% of 308,100)	308,100
March purchases			81,975 (50% of 163,950)	81,975
Total disbursements	217,200	285,225	236,025	738,450