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:

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

Cash	$	62,000
Accounts receivable		217,600
Inventory		61,050
Buildings and equipment (net)		372,000
Accounts payable			$	91,725
Common stock				500,000
Retained earnings				120,925
	$	712,650	$	712,650

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

December(actual)	$272,000
January	$407,000
February	$604,000
March	$319,000
April	$215,000

c.	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.
d.	The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)
e.	Monthly expenses are budgeted as follows: salaries and wages, $37,000 per month: advertising, $59,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,620 for the quarter.
f.	Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.
g.	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.
h.	During February, the company will purchase a new copy machine for $3,200 cash. During March, other equipment will be purchased for cash at a cost of $81,000.
i.	During January, the company will declare and pay $45,000 in cash dividends.
j.	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:

          

	*$407,000 sales × 60% cost ratio = $244,200.
	†$362,400 × 25% = $90,600.

  

2-b.	Schedule of expected cash disbursements for merchandise purchases:

         

3.	Cash budget. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

          

4.	Prepare an absorption costing income statement for the quarter ending March 31.

         

5.	Prepare a balance sheet as of March 31.

         

Garrison 15e Recheck 2015-01-16

Answer 1

Answer a
Sales Budget
	Jan	Feb	March	Total
Sales in Units	407,000	604,000	319,000	1,330,000
Cash Sales - 20%	81,400	120,800	63,800	266,000
Credit Sales - 80%	325,600	483,200	255,200	1,064,000
Answer b
Schedule of Expected Cash Collections from Sales
	Jan	Feb	March	Total
Cash Sales	81,400	120,800	63,800	266,000
Collection from Accounts Receivables
Dec Sales	217,600			217,600
Jan Sales		325,600		325,600
Feb Sales			483,200	483,200
Total cash Collections	299,000	446,400	547,000	1,292,400
Answer c
Merchandise Purchase Budget
	Jan	Feb	March	Total
Cost of Goods Sold - 60%	244,200	362,400	191,400	798,000
Add: Closing Inventory -25%	90,600	47,850	32,250	32,250
Total Needs	334,800	410,250	223,650	830,250
Less: opening Inventory in uints	(61,050)	(90,600)	(47,850)	(61,050)
Required Purchases	273,750	319,650	175,800	769,200
Answer d
Schedule of Cash payments to Suppliers
	Jan	Feb	March	Total
Cash Payment
Accounts Payable - Dec	91,725			91,725
Jan Purchases	136,875	136,875		273,750
Feb Purchases		159,825	159,825	319,650
Mar Purchases			87,900	87,900
Total Cash Payment to Suppliers	228,600	296,700	247,725	773,025
Answer e
Schedule of Cash payments of Selling & Admn. Budget
	Jan	Feb	March	Total
Salaries & Wages	37,000	37,000	37,000	111,000
Advertising	59,000	59,000	59,000	177,000
Shipping - 5% of Sales	20,350	30,200	15,950	66,500
Other Expense - 3% of Sales	12,210	18,120	9,570	39,900
				-
Total	128,560	144,320	121,520	394,400
Cash budget
	Jan	Feb	March	Total
Opening cash Balance	62,000	30,840	33,020	62,000
Add: receipts
Collection from Customers	299,000	446,400	547,000	1,292,400
Total Cash available	361,000	477,240	580,020	1,354,400
Less: Disbursements
Cash Disbursement - Accounts Payable	228,600	296,700	247,725	773,025
Selling & Admn. Exp.	128,560	144,320	121,520	394,400
Purchase of Equipment	-	3,200	81,000	84,200
Dividend Paid	45,000	-	-	45,000
Total Disbursement	402,160	444,220	450,245	1,296,625
Excess (deficiency) of Cash	(41,160)	33,020	129,775	57,775
Add: Finance from Bank	72,000			72,000
Less: Payment to Bank	-	-	(72,000)	(72,000)
Less: Payment of interet - Bank loan	-	-	(2,160)	(2,160)
Total Financing	72,000	-	(74,160)	(2,160)
Net Cash Balance Closing	30,840	33,020	55,615	55,615
Income Statement
For the Qtr Ending Mar 31
Sales		1,330,000
Cost of Goods Sold - 60%		798,000
Gross Margin		532,000
Less: Selling & Admn. Exp.
Salaries & Wages	111,000
Advertising	177,000
Shipping - 5% of Sales	66,500
Other Expense - 3% of Sales	39,900
Dep.	45,620	440,020
Operating Profit		91,980
Less: Interest Expenses		2,160
Net Income		89,820
Balance Sheet
As on March 31
Assets
Current Assets
Cash	55,615
Accounts receivables	255,200
Inventory	32,250	343,065
Fixed Assets
Building & Equipment	372,000
Add: Purchases	84,200
Less: Dep.	(45,620)	410,580
Total Assets		753,645
Liabilities
Accounts Payable		87,900
Total liabilities		87,900
Shareholders's Equity
Common Stock	500,000
Retained Earnings	165,745
Total Stockholders equity		665,745
Total liabilities & Stockholders' Equity		753,645		-
Schedule of Retained Earnings
As on Mar 31
Opening Balance		120,925
Add: net income		89,820
Less: Dividend declared		(45,000)
Closing Balance		165,745