Question

he following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods: Current assets as of March 31: Cash $ 8,200 Accounts receivable $ 22,800 Inventory $ 43,800 Building and equipment, net $ 128,400 Accounts payable $ 26,175 Capital stock $ 150,000 Retained earnings $ 27,025 a. The gross margin is 25% of sales. b. Actual and budgeted sales data: March (actual) $57,000 April $73,000 May $78,000 June $103,000 July $54,000 c. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales. d. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold. e. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory. f. Monthly expenses are as follows: commissions, 12% of sales; rent, $3,000 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $963 per month (includes depreciation on new assets). g. Equipment costing $2,200 will be purchased for cash in April. h. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. 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, up to a total loan balance of $20,000. 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: 1. Complete the following schedule. 2. Complete the following: Budgeted cost of goods sold for April = $73,000 sales × 75% = $54,750. Add desired ending inventory for April = $58,500 × 80% = $46,800. 3. Complete the following cash budget: (Borrow and repay in increments of $1,000. Cash deficiency, repayments and interest should be indicated by a minus sign.) 4. Prepare an absorption costing income statement for the quarter ended June 30. 5. Prepare a balance sheet as of June 30.

Answer 1

Required Budgets are as prepared below:

Shillow Company
Schedule of expected Cash collections
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Sales	73,000	78,000	103,000	254,000
Beginning Accounts Receivable
March Credit sales (57,000*.4)	22,800			22,800
April Cash Sales	43,800			43,800
April Credit Sales		29,200		29,200
May Cash sales		46,800		46,800
May Credit Sales			31,200	31,200
June Cash sales			61,800	61,800
June Credit Sales				0
Total collections	66,600	76,000	93,000	235,600
Account receivable for June sale			41,200
Shillow Company
Merchandise Purchase Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Cost of goods sold (75% of sales)	54,750	58,500	77,250	190,500
Add: Desired Ending merchandise inventory (80% of next month COGS)	46,800	61,800	32,400	32,400
Total needs	101,550	120,300	109,650	222,900
Less: beginning merchandise inventory	43,800	46,800	61,800	43,800
Required purchase	57,750	73,500	47,850	179,100
Shillow Company
Schedule of expected Cash payments
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Accounts Payable (a)	$26,175			$26,175
April Purchases (b)	$28,875	$28,875		$57,750
May Purchases (c )		$36,750	$36,750	$73,500
June Purchases (d)			$23,925	$23,925
Total payments (a+b+c+d)	$55,050	$65,625	$60,675	$181,350
Shillow Company
Cash Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Cash balance	8,200	4,410	4,745	8,200
Add: Collection from customers	$66,600	$76,000	$93,000	235,600
cash available for use	$74,800	$80,410	$97,745	$243,800
Less: cash Disbursements
Merchandise purchase	$55,050	$65,625	$60,675	181,350
Commissions (12% of sales)	8,760	9,360	12,360	30,480
Rent	3,000	3,000	3,000	9,000
Other exp (6% of sales)	4,380	4,680	6,180	15,240
Equipment purchase	2,200	0	0	2,200
Total disbusrement	73,390	82,665	82,215	238,270
Cash surplus/Deficit	1,410	-2,255	15,530	5,530
Financing
Borrowing	3,000	7,000		10,000
Repayment			-10,000	-10,000
Interest			-130	-130
Net cash from Financing	3,000	7,000	10,130	-130
Budgeted ending cash balance	4,410	4,745	5,400	5,400
Shillow Company
Budgeted Income Statement
For the quarter ended June 30
Particulars	Amount ($)	Amount ($)
Sales		254,000
Less: Cost of goods sold (75% of sales)		190,500
Gross margin		63,500
Less: Selling and administartive exp
Depreciation (963*3)	2,889
Commissions (12% of sales)	30,480
Rent	9,000
Other exp (6% of sales)	15,240	57,609
Net operating Income		5,891
Interest expense		130
Net Income		5,761
Shillow Company
Budgeted balance Sheet
Jun-30
Assets
Cash	5,400
Accounts Receivable	41,200
Inventory	32,400
Building and equipment Net )(128,400+2,200-2,889)	127,711
Total assets	206,711
Liabilities and Stockholders' Equity
Accounts Payable purchases	23,925
Common Stock	150,000
Retained earnings (27,025+5,761)	32,786
Total liabilities and stockholders' equity	206,711
Interest 3,000*2%	60
7,000*1%	70
	130