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	$	46,000
Accounts receivable		204,800
Inventory		58,650
Buildings and equipment (net)		356,000
Accounts payable					$	86,925
Common stock						500,000
Retained earnings						78,525
	$	665,450			$	665,450

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

December(actual)	$	256,000
January	$	391,000
February	$	588,000
March	$	302,000
April	$	199,000

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, $21,000 per month: advertising, $61,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $43,060 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 $1,600 cash. During March, other equipment will be purchased for cash at a cost of $73,000.

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

	Schedule of Expected Cash Collections January February March Quarter Cash sales $78,200 $117,600 $60,400 $256,200 Credit sales 204,800 312,800 470,400 988,000 Total collections $283,000 $430,400 $530,800 $1,244,200

2-a. Merchandise purchases budget:

	Merchandise Purchases Budget January February March Quarter Budgeted cost of goods sold 234,600* $352,800 Add desired ending inventory 88,200† Total needs 322,800 352,800 0 0 Less beginning inventory 58,650 Required purchases $264,150 $352,800 $0 $0

*$391,000 sales × 60% cost ratio = $234,600.

†$352,800 × 25% = $88,200.

  

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

	Schedule of Expected Cash Disbursements for Merchandise Purchases January February March Quarter December purchases $86,925 $86,925 January purchases 132,075 132,075 264,150 February purchases 0 March purchases 0 Total cash disbursements for purchases $219,000 $132,075 $0 $351,075

Answer 1

(1) Statement of Expected cash collection:-

	January	Feb	March	Quarter
Cash sales	78200	117600	60400	256200
Credit Sales	204800	312800	470400	988000
Total collections	283000	430400	530800	1244200

(2) Merchandise Purchase Budget :-

	January	Feb	March	Quarter
Budgeted COGS	234600	352800	181200	768600
Add:- Desired ending Inventory	(352800*25%) =88200	(181200*25%) =45300	(119400*25%) =29850
Total needs	322800	398100	211050	931950
Less:- Beginning Inventory	58650	88200	45300
Required Purchases	264150	309900	165750	739800

Working Note = COGS

	January	Feb	March	April
Budgeted sale	391000	588000	302000	199000
COGS (60%)	234600	352800	181200	119400

(2b) Expected cash disbursement for merchandise purchase :-

  

	January	Feb	March	Quarter
December purchases	86925	----	-------	86925
January purchases	(264150/2) =132075	(264150/2) =132075	------	264150
Feb purchases	-----	(309900/2) =154950	(309900/2) =154950	309900
March purchases	-----	------	(165750/2) =82875	82875
Total cash disbursement for purchases	219000	287025	237825	743850