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	$	51,000
Accounts receivable		208,800
Inventory		59,400
Buildings and equipment (net)		361,000
Accounts payable			$	88,425
Common stock				500,000
Retained earnings				91,775
	$	680,200	$	680,200

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

December(actual)	$	261,000
January	$	396,000
February	$	593,000
March	$	307,000
April	$	204,000

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, $26,000 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 $43,860 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 $2,100 cash. During March, other equipment will be purchased for cash at a cost of $75,500.

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	396,000	593,000	307,000	1,296,000
b) Cash Sales (a*20%)	79,200	118,600	61,400	259,200
c) Credit Sales (a*80%)	316,800	474,400	245,600	1,036,800
d) Collection for credit sales (received in the next month following credit sale)	208,800	316,800	474,400	1,000,000
Expected Cash collections (b+d)	288,000	435,400	535,800	1,259,200

2-a) Schedule of Merchandise Purchases Budget			(Amounts in $)
	January	February	March	Quarter
i) Total Sales	396,000	593,000	307,000	1,296,000
ii) Cost of goods sold [(i)*60%]	237,600	355,800	184,200	777,600
iii) Desired Ending Inventory (25% of next month cost of goods sold)	88,950	46,050	30,600	30,600
iv) Beginning Inventory	59,400	88,950	46,050	59,400
v) Required Purchases [(ii)+(iii)-(iv)]	267,150	312,900	168,750	748,800

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)	88425	0	0	88,425
January Purchase (267,150*50%)	133,575	133,575	0	267,150
February Purchase (312,900*50%)	0	156,450	156,450	312,900
March Purchase (168,750*50%)	0	0	84,375	84,375
Total cash disbursements for purchase	222,000	290,025	240,825	752,850

3) Cash Budget for the Quarter ending March 31 (Amounts in $)
	January	February	March	Quarter
Beginning Cash Balance	51,000	30,320	34,155	51,000
Cash Collections for sales	288,000	435,400	535,800	1,259,200
Total Cash Available (A)	339,000	465,720	569,955	1,310,200
Expected Cash Disbursements:
Cash disbursements for purchase	222,000	290,025	240,825	752,850
Salaries and Wages	26,000	26,000	26,000	78,000
Advertising	66,000	66,000	66,000	198,000
Shipping (5% of sales)	19,800	29,650	15,350	64,800
Other Expense (3% of sales)	11880	17790	9210	38,880
Purchase of machine	0	2,100	75,500	77,600
Cash Dividends	45,000	0	0	45,000
Total Cash Disbursements (B)	390,680	431,565	432,885	1,255,130
Excess of (Deficit) of cash (C = A-B)	-51,680	34,155	137,070	55,070
Financing:
Borrowing	82,000	0	0	82,000
Repayments	0	0	82,000	82,000
Interest	0	0	2460	2,460
Total Financing (D)	82,000	0	-84,460	-2,460
Ending Cash Balance (C+D)	30,320	34,155	52,610	52,610

4) Absorption Costing Income Statement
For The Quarter Ending March 31 (Amounts in $)
Sales	1,296,000
Less: Cost of Goods Sold	777,600
Gross Profit (A)	518,400
Operating Expenses:
Salaries and Wages	78,000
Advertising	198,000
Shipping	64,800
Other Expenses	38,880
Depreciation	43,860
Interest Expense	2,460
Total Operating Expenses (B)	426,000
Net Income (A-B)	92,400

5) Balance Sheet as of March 31 is shown as follows:- (Amounts in $)

Assets
Cash	52,610
Accounts receivable (March's credit sales)	245,600
Inventory	30,600
Buildings and equipment (net) (361,000+77,600-43,860)	394,740
Total Assets	723,550
Liabilities and Stockholders' Equity:
Accounts payable (168,750*50%)	84,375
Common stock	500,000
Retained earnings (91,775+92,400-45,000)	139,175
Total Liabilities and Stockholders' Equity	723,550