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	$	62,000
Accounts receivable		217,600
Inventory		61,050
Buildings and equipment (net)		372,000
Accounts payable			$	91,725
Common stock				500,000
Retained earnings				120,925
	$	712,650	$	712,650

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

December(actual)	$	272,000
January	$	407,000
February	$	604,000
March	$	319,000
April	$	215,000

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, $37,000 per month: advertising, $59,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, f. including depreciation on new assets acquired during the quarter, will be $45,620 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 $3,200 cash. During March, other equipment will be purchased for cash at a cost of $81,000.

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:

	Schedule of Expected Cash Collections January February March Quarter Cash sales $81,400 Credit sales 217,600 Total collections $299,000

2-a. Merchandise purchases budget:

	Merchandise Purchases Budget January February March Quarter Budgeted cost of goods sold 244,200* $362,400 Add desired ending inventory 90,600† Total needs 334,800 Less beginning inventory 61,050 Required purchases $273,750 *$407,000 sales × 60% cost ratio = $244,200. †$362,400 × 25% = $90,600.

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

	Schedule of Expected Cash Disbursements for Merchandise Purchases January February March Quarter December purchases $91,725 January purchases 136,875 136,875 February purchases March purchases Total cash disbursements for purchases

3. Cash budget:

Hillyard Company Cash Budget January February March Quarter Beginning cash balance $62,000 Add cash collections 299,000 Total cash available Less cash disbursements: Inventory purchases 228,600 Selling and administrative expenses 128,560 Equipment purchases Cash dividends 45,000 Total cash disbursements 402,160 Excess (deficiency) of cash Financing: Borrowings Repayments Interest Total financing Ending cash balance

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

	Hillyard Company Income Statement For the Quarter Ended March 31                           Cost of goods sold: Selling and administrative expenses:

5. Prepare a balance sheet as of March 31.

	Hillyard Company Balance Sheet March 31 Assets Current assets:                                Total current assets Total assets Liabilities and Stockholders’ Equity Current liabilities: Stockholders' equity: Total liabilities and stockholders’ equity

Answer 1

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1. Schedule of expected cash collections:
Schedule of Expected Cash Collections
	January	February	March	Quarter
Cash sales (20%*Sale)	81400	120800	63800	266000
Credit sales (80% of Last Month Sale)	217,600	325600	483200	1,026,400	255200
Total collections	299000	446400	547000	1292400	255200
2-a. Merchandise purchases budget:	407000	604000	319000		215000
Merchandise Purchases Budget
	January	February	March	Quarter	April
Budgeted cost of goods sold (60% of Sale)	244200	362400	191400	798000	129000
Add desired ending inventory (25% of Next Month COGS)	90600	47850	32250	32250
Total needs	334,800	410,250	223,650	830,250
Less beginning inventory	61,050	90600	47850	61,050
Required purchases	273,750	319,650	175,800	769,200
*$407,000 sales × 60% cost ratio = $244,200.
†$362,400 × 25% = $90,600.
2-b. Schedule of expected cash disbursements for merchandise purchases:
Schedule of Expected Cash Disbursements for Merchandise Purchases
	January	February	March	Quarter
December purchases	91725			91725
January purchases	136,875	136,875		273750
February purchases		159825	159825	319650
March purchases			87900	87900	87,900
Total cash disbursements for purchases	228600	296700	247725	773025	87,900
3. Cash budget:
Hillyard Company
Cash Budget
	January	February	March	Quarter
Beginning cash balance	62000	30,480	45,268	62000
Add cash collections	299,000	446,400	547,000	1,292,400
Total cash available	361000	476880	592268	1354400
Less cash disbursements:
Inventory purchases	228,600	296,700	247,725	773,025
Selling and administrative expenses	119,920	131,712	139,760	391,392
Equipment purchases		3200	81000	84,200
Cash dividends	45,000			45,000
Total cash disbursements	393,520	431,612	468,485	1,293,617
Excess (deficiency) of cash	-32,520	45,268	123,783	60,783
Financing:
Borrowings	63000			63000
Repayments			-63000	-63000
Interest			-1890	-1890
Total financing	63000	0	-64890	-1890
Ending cash balance	30,480	45,268	58,893	58,893
Working:
Selling and administrative expenses	January	February	March	Quarter
Salaries and wages	37000	37000	37000	111000
Advertising	59000	59000	59000	177000
Shipping 5% of Sale	14950	22320	27350	64620
Other Expense 3% of Sale	8970	13392	16410	38772
Cash Payment for Selling and Admin Expense	119920	131712	139760	391392
4. Prepare an absorption costing income statement for the quarter ending March 31.
Hillyard Company
Income Statement
For the Quarter Ended March 31
Sales		1330000
Less:Cost of goods sold:		798000
Gross Margin		532000
Less:Selling and administrative expenses:
Salaries and wages	111000
Advertising	177000
Shipping 5% of Sale	64620
Other Expense 3% of Sale	38772
Depreciation	45620
Total Expense		437012
Operating Income		94988
Less: Interest		1890
Net Income		93098
5. Prepare a balance sheet as of March 31.
Hillyard Company
Balance Sheet
Mar-31
Assets
Current assets:
Cash		58,893
Accounts Receivable		255200
Inventory		32250
Total current assets		346,343
Building and Equipment (372000+3200+81000)-45620		410580
Total assets		756,923
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts Payable		87900
Stockholders' equity:
Common Stock		500000
Retained Earning		169023
(120925+93098-45000)
Total liabilities and stockholders’ equity		756923