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	$	41,000
Accounts receivable		200,800
Inventory		57,900
Buildings and equipment (net)		351,000
Accounts payable			$	85,425
Common stock				500,000
Retained earnings				65,275
	$	650,700	$	650,700

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

December(actual)	$	251,000
January	$	386,000
February	$	583,000
March	$	297,000
April	$	194,000

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, $16,000 per month: advertising, $56,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,260 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 $1,100 cash. During March, other equipment will be purchased for cash at a cost of $70,500.

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

Required Budgets are as prepared below:

Hillyard Company
Schedule of expected Cash collections
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Sales	386,000	583,000	297,000	1,266,000	194,000
Beginning Accounts Receivable
December Credit sales (251,000*.8)	200,800			200,800
January sales	77,200	308,800		386,000
February sales		116,600	466,400	583,000
March sales			59,400	59,400
Total collections	278,000	425,400	525,800	1,229,200
Account receivable for March sale			237,600
Hillyard Company
Merchandise Purchase Budget
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Cost of goods sold (60% of sales)	231,600	349,800	178,200	759,600	116400
Add: Desired Ending merchandise inventory (25% of next month COGS)	87,450.0	44,550.0	29,100.0	29,100
Total needs	319,050	394,350	207,300	788,700
Less: beginning merchandise inventory	57,900	87,450	44,550	57,900
Required purchase	261,150	306,900	162,750	730,800
Hillyard Company
Schedule of expected Cash payments
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Beginning Accounts Payable (a)	$85,425			$85,425
January Purchases (b)	$130,575	$130,575		$261,150
February Purchases (c )		$153,450	$153,450	$306,900
March Purchases (d)			$81,375	$81,375
Total payments (a+b+c+d)	$216,000	$284,025	$234,825	$734,850
Hillyard Company
Cash Budget
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Beginning Cash balance	41,000	31,120	52,755	41,000
Add: Collection from customers	$278,000	$425,400	$525,800	1,229,200
cash available for use	$319,000	$456,520	$578,555	$1,270,200
Less: cash Disbursements
Merchandise purchase	$216,000	$284,025	$234,825	734,850
Salaries and wages	16,000	16,000	16,000	48,000
Advertising	56,000	56,000	56,000	168,000
Shipping (5% of sales)	19,300	29,150	14,850	63,300
Other exp (3% of sales)	11,580	17,490	8,910	37,980
New Copy machine	0	1,100	0	1,100
Equipment purchase		0	70,500	70,500
Dividend paid	45,000			45000
Total disbusrement	363,880	403,765	401,085	1,168,730
Cash surplus/Deficit	-44,880	52,755	177,470	101,470
Financing
Borrowing	76,000			76,000
Repayment			76,000	-76,000
Interest			1520	-1,520
Net cash from Financing	76,000	0	-77,520	-1,520
Budgeted ending cash balance	31,120	52,755	99,950	99,950
Hillyard Company
Budgeted Income Statement
For the quarter ended March 31
Particulars	Amount ($)	Amount ($)
Sales		1,266,000
Less: Cost of goods sold (60% of sales)		759,600
Gross margin		506,400
Less: Selling and administartive exp
Depreciation	42,260
Salaries and wages	48,000
Advertising	168,000
Shipping Charges	63,300
Other expenses	37,980	359,540
Net operating Income		146,860
Interest expense		1,520
Net Income		145,340
Dividend Paid		45,000
Net Income		100,340
Hillyard Company
Budgeted balance Sheet
Mar-31
Assets
Cash	99,950
Accounts Receivable	237,600
Inventory	29,100
Buildings and equipment Net (351,000+1,100+70,500-42,260)	380,340
Total assets	746,990
Liabilities and Stockholders' Equity
Accounts Payable purchases	81,375
Common Stock	500,000
Retained earnings (65,275+100,340)	165,615
Total liabilities and stockholders' equity	746,990