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 $

55,000

Accounts receivable

212,000

Inventory

60,000

Buildings and equipment (net)

365,000

Accounts payable $

89,625

Common stock

500,000

Retained earnings

102,375

$

692,000

$

692,000

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

December(actual) $

265,000

January $

400,000

February $

597,000

March $

312,000

April $

208,000

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, $30,000 per month: advertising, $66,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,500 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 $2,500 cash. During March, other equipment will be purchased for cash at a cost of $77,500.

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

ans 1
Schedule of Expected Cash Collections
	January	Feb	March	Quarter	April
Total sales T	$400,000	597000	312000	1309000	208000
Cash Sales (20% for cash) S	$80,000	$119,400	$62,400	$261,800
Credit Sales (T-S)	89625	$320,000	$477,600	887225
Total Collections	169625	439400	540000	1149025
Merchandise Purchases Budget
	January	Feb	March	Quarter	April
Budgeted Cost of Goods Sold (60%*sales)	$240,000	$358,200	$187,200	$785,400	$124,800
Add Desired Ending Inventory (25%*next COGS	$89,550	$46,800	$31,200.0	$31,200.0
Total Needs	$329,550	$405,000	$218,400	$816,600
Less Beginning Inventory	$60,000	$89,550	$46,800	$60,000
Required Purcahses	$269,550	$315,450	$171,600	$756,600
Schedule of Expected Cash Disbursements- Merchandise Purchases
(50% in same month and 50% in next month)	January	Feb	March	Quarter
March Purchases	$89,625			$89,625
April Purchases	$134,775	$134,775		$269,550
May Purchases		$157,725	$157,725	$315,450
June Purchases			$85,800	$85,800
Total Disbursements	$224,400	$292,500	$243,525	$760,425
Cash Budget
	January	Feb	March	Quarter
Beginnning Cash Balance	55,000	$30,225	$30,895	55,000
Add Cash Collections	169,625	439,400	540,000	1,149,025
Total Cash Avail	224,625	469,625	570,895	1,204,025
Less Cash Disbursements
For Inventory	$224,400	$292,500	$243,525	$760,425
For Expenses	132000	149730	124080	405810
For dividend	45000	0	0	45000
For Equipment	0	2500	77500	80000
Total Cash Disbursements	$401,400	$444,730	$445,105	$1,291,235
Excess(Deficiency) of Cash	($176,775)	$24,895	$125,790	($87,210)
Financing:
Borrowings:	207000	6000		213000
Repayments:			-89000	-89000
Interest:			-6330	-6330
Total Financing	207000	6000	-95330	117670
Ending Cash Balance	$30,225	$30,895	$30,460	$30,460
Interet: (207000*3%)+(6000*2%)
working
Expenses
	January	Feb	March	Quarter
Salaries & wages	30000	30000	30000	90000
Advertising	66000	66000	66000	198000
Shipping (6%*sales)	$24,000	$35,820	$18,720	$78,540
Other expenses (3%*sales)	$12,000	$17,910	$9,360	$39,270
Total cash expenses	132000	149730	124080	405810
Income statement
sales		1309000
Less;: Cost of Good sold		$785,400
Gross profit		$523,600
Less: S & A exp
Salaries & wages	90000
Advertising	198000
Shipping (6%*sales)	78540
Other expenses (3%*sales)	39270
Depreciation	44500
Total S & A exp		450310
Net operating income		$73,290
Interest exp		-6330
Net Income		$66,960
Balance sheet
Current assets
Cash		30,460
Accounts receivable		249,600
Inventory		31,200
Total Current assets		311,260
Building and equipment, net (365000+80000-44500)		400500
Total assets		711,760
Liabilities & stockholder equity
Current liabilities
Accounts payable		85,800
Bank loan payable		124,000
Total current liabilities		209,800
stockholder equity
Common stock	500000
Retained earnings (102375+66960-45000)	$124,335
Totl stockholder equity		$624,335
Total Liabilities & stockholder equity		$834,135