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	$	53,000
Accounts receivable		210,400
Inventory		59,700
Buildings and equipment (net)		363,000
Accounts payable			$	89,025
Common stock				500,000
Retained earnings				97,075
	$	686,100	$	686,100

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

December(actual)	$	263,000
January	$	398,000
February	$	595,000
March	$	309,000
April	$	206,000

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, $28,000 per month: advertising, $68,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,180 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 $2,300 cash. During March, other equipment will be purchased for cash at a cost of $76,500.

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:

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			79600	119000	61800	260400
Credit sales			210,400	318400	476000	1,004,800
total collections			290000	437400	537800	1265200
Accounts receivable at march 31= 309,000*80%=247,200
2-a)		Merchandise purchase budget
			January	Feburary	March	Quarter		April
budgeted cost of goods sold			238800	357000	185400	781200		123600
Add:Ending inventory			89250	46350	30900	30,900
total needs			328050	403350	216300	812100
less Beginning inventory			59,700	89,250	46,350	59,700
Required purchases			268,350	314,100	169,950	752,400
2-b)	Schedule of Expected cash disbursement for Merchandise purchase
			January	Feburary	March	Quarter
December purchases			89,025			89,025
january purchases			134175	134175		268350
Feburary purchases				157050	157050	314100
march purchases					84975	84975
total cash disbursement for purchases			223,200	291225	242025	756,450
Accounts payable=		84,975
3)			Cash budget
			January	Feburary	March	Quarter
Beginning cash balance			53,000	30,960	31235	53,000
Add cash collections			290000	437400	537800	1265200
total cash available			343,000	468360	569035	1,318,200
less cash disbursements
purchase of inventory			223,200	291225	242025	756,450
selling and adm expense			127840	143600	120720	392160
purchase of equipment			0	2,300	76,500	78800
cash dividends			45,000	0	0	45,000
total cash disbursement			396,040	437125	439245	1,272,410
Excess(Deficiency) of cash			-53,040	31235	129790	45,790
Financing
Borrowings			84,000	0	0	84,000
Repayments			0	0	-84,000	-84000
interest			0	0	-2,520	-2520
total financing			84,000	0	-86520	-2,520
ending cash balance			30,960	31235	43270	43,270
	interest expense = 84000*1%*3
			2520
4)			income statememt
Sales						1302000
cost of goods sold
Beginning invnetory				59,700
Add purchases				752,400
cost of goods avaialble				812,100
less ending inventory				30,900		781,200
Gross profit						520,800
Selling and administrative exp
Salaries and wages				84,000
Advertising				204,000
shiiping 5% of sales				65100
other expense 3% of sales				39060
Depreciation				44,180		436,340
operating income						84,460
less interest expense						2,520
Net income						81,940
5)		Balance sheet
Asses
current assets
cash						43270
Account receivable						247,200
inventory						30,900
total current assets						321,370
buildings and Equipment (net)			(363000+2300+76500-44180)			397620
total assets						718,990
liabilities & stockholders Equity
current liabilities
Accounts payable						84,975
total current liabilities						84,975
Stockholders Equity
common stock						500,000
Retained earnings		(97,075+81,940-45000)				134,015
total stockholders equity						634,015
total liabilities & stockholders equity						718,990