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	$	64,000
Accounts receivable		219,200
Inventory		61,350
Buildings and equipment (net)		374,000
Accounts payable			$	92,325
Common stock				500,000
Retained earnings				126,225
	$	718,550	$	718,550

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

December(actual)	$	274,000
January	$	409,000
February	$	606,000
March	$	321,000
April	$	217,000

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, $39,000 per month: advertising, $57,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,940 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 $3,400 cash. During March, other equipment will be purchased for cash at a cost of $82,000.

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:

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	February	March	1st Quarter
	Sales $	409000	606000	321000
	Cash sales (20%)	81800	121200	64200	267200
	Credit sales (80%):
	December sales	219200			219200
	January sales		327200		327200
	February sales			484800	484800
	Expected cash collections $	301000	448400	549000	1298400
2-a.	Merchandise Purchases Budget
		January	February	March	1st Quarter
	Sales	409000	606000	321000
	Cost of goods sold (60%)	245400	363600	192600	801600
	Desired ending inventory as percent of following month's cost of goods sold	25%	25%	25%
	Ending inventory	90900	48150	32550	32550
	Total required	336300	411750	225150	834150
	Less: Beginning inventory	61350	90900	48150	61350
	Budgeted merchandise purchases $	274950	320850	177000	772800
2-b.	Schedule of Expected Cash Disbursements for Merchandise Purchases
		January	February	March	1st Quarter
	December purchases	92325			92325
	January purchases	137475	137475		274950
	February purchases		160425	160425	320850
	March purchases			88500	88500
	Expected cash disbursements $	229800	297900	248925	776625
3	Cash Budget
		January	February	March	1st Quarter
	Beginning cash balance $	64000	30480	33100	64000
	Add collections from customers	301000	448400	549000	1298400
	Total cash available	365000	478880	582100	1362400
	Less cash disbursements:
	Merchandise purchases	229800	297900	248925	776625
	Salaries and wages	39000	39000	39000	117000
	Advertising	57000	57000	57000	171000
	Shipping (5% of sales)	20450	30300	16050	66800
	Other expenses (3% of sales)	12270	18180	9630	40080
	Purchase of new copy machine		3400		3400
	Purchase of other equipment			82000	82000
	Cash dividends	45000			45000
	Total cash disbursements	403520	445780	452605	1301905
	Excess of cash available over disbursements	-38520	33100	129495	60495
	Financing:
	Borrowings	69000			69000
	Repayments			-69000	-69000
	Interest			-2070	-2070
	Total financing	69000	0	-71070	-2070
	Ending cash balance $	30480	33100	58425	58425
	Interest = $69000 x 1% x 3 months = $2070

4.

Hillyard Company
Absorption Costing Budgeted Income Statement
For the Quarter Ending March 31
Sales revenue		1336000
Cost of goods sold		801600
Gross profit		534400
Less: Expenses
Salaries and wages expense	117000
Advertising expense	171000
Shipping expense	66800
Other expenses	40080
Depreciation expense	45940
Interest expense	2070
Total expenses		442890
Net income $		91510

5.

Hillyard Company
Budgeted Balance Sheet
March 31
Assets
Cash	58425
Accounts receivable ($321000 x 80%)	256800
Inventory	32550
Buildings and equipment, net of depreciation	413460
($374000 + $3400 + $82000 - $45940)
Total assets $	761235
Liabilities and Stockholders' Equity
Accounts payable ($177000 x 50%)	88500
Common stock	500000
Retained earnings ($126225 + $91510 - $45000)	172735
Total liabilities and stockholders' equity $	761235