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:

1. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

Cash	$	57,000
Accounts receivable		213,600
Inventory		60,300
Buildings and equipment (net)		367,000
Accounts payable			$	90,225
Common stock				500,000
Retained earnings				107,675
	$	697,900	$	697,900

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

December(actual)	$	267,000
January	$	402,000
February	$	599,000
March	$	314,000
April	$	210,000

3. 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.

4. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

5. Monthly expenses are budgeted as follows: salaries and wages, $32,000 per month: advertising, $64,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,820 for the quarter.

6. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.

7. 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.

8. During February, the company will purchase a new copy machine for $2,700 cash. During March, other equipment will be purchased for cash at a cost of $78,500.

9. During January, the company will declare and pay $45,000 in cash dividends.

10. 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 (Amounts in $)

	January	February	March	Quarter
a) Total Sales	402,000	599,000	314,000	1,315,000
b) Cash Sales (a*20%)	80,400	119,800	62,800	263,000
c) Credit Sales (a*80%)	321,600	479,200	251,200	1,052,000
d) Collection for credit sales (received in the next month following credit sale)	213,600	321,600	479,200	1,014,400
Expected Cash collections (b+d)	294,000	441,400	542,000	1,277,400

2-a) Schedule of Merchandise Purchases Budget (Amounts in $)

	January	February	March	Quarter
i) Total Sales	402,000	599,000	314,000	1,315,000
ii) Cost of goods sold [(i)*60%]	241,200	359,400	188,400	789,000
iii) Desired Ending Inventory (25% of next month cost of goods sold)	89,850 (359,400*25%)	47,100 (188,400*25%)	31,500 [(210,000*60%)*25%]	31,500
iv) Beginning Inventory	60,300	89,850	47,100	60,300
v) Required Purchases [(ii)+(iii)-(iv)]	270,750	316,650	172,800	760,200

2-b) Schedule of expected cash disbursements for purchases (Amounts in $)

	January	February	March	Quarter
Cash Disbursements for:
December Purchase (50% in the month of purchase and 50% in the next month)	90,225 (Accounts payable)	-	-	90,225
January Purchase (270,750*50%)	135,375	135,375	-	270,750
February Purchase (316,650*50%)	-	158,325	158,325	316,650
March Purchase (172,800*50%)	-	-	86,400	86,400
Total cash disbursements for purchase	225,600	293,700	244,725	764,025

3) Cash Budget for the Quarter ending March 31 (Amounts in $)

	January	February	March	Quarter
Beginning Cash Balance	57,000	30,240	31,320	57,000
Cash Collections for sales	294,000	441,400	542,000	1,277,400
Total Cash Available (A)	351,000	471,640	573,320	1,334,400
Expected Cash Disbursements:
Cash disbursements for purchase	225,600	293,700	244,725	764,025
Salaries and Wages	32,000	32,000	32,000	96,000
Advertising	64,000	64,000	64,000	192,000
Shipping (5% of sales)	20,100 (402,000*5%)	29,950 (599,000*5%)	15,700 (314,000*5%)	65,750
Other Expense (3% of sales)	12,060 (402,000*3%)	17,970 (599,000*3%)	9,420 (314,000*3%)	39,450
Purchase of machine	0	2,700	78,500	81,200
Cash Dividends	45,000	0	0	45,000
Total Cash Disbursements (B)	398,760	440,320	444,345	1,283,425
Excess of (Deficit) of cash (C = A-B)	(47,760)	31,320	128,975	50,975
Financing:
Borrowing	78,000 [(30,000+47,760) rounded off to next 1,000]	0	0	78,000
Repayments	0	0	(78,000)	(78,000)
Interest	0	0	(2,340) (78,000*3%)	(2,340)
Total Financing (D)	78,000	0	(80,340)	(2,340)
Ending Cash Balance (C+D)	30,240	31,320	48,635	48,635

4) Absorption Costing Income Statement

For The Quarter Ending March 31 (Amounts in $)

Sales	1,315,000
Less: Cost of Goods Sold	(789,000)
Gross Profit (A)	526,000
Operating Expenses:
Salaries and Wages	96,000
Advertising	192,000
Shipping	65,750
Other Expenses	39,450
Depreciation	44,820
Total Operating Expenses (B)	438,020
Net Income (A-B)	87,980