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	$	43,000
Accounts receivable		202,400
Inventory		58,200
Buildings and equipment (net)		353,000
Accounts payable			$	86,025
Common stock				500,000
Retained earnings				70,575
	$	656,600	$	656,600

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

December(actual)	$	253,000
January	$	388,000
February	$	585,000
March	$	299,000
April	$	196,000

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, $18,000 per month: advertising, $58,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,580 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 $1,300 cash. During March, other equipment will be purchased for cash at a cost of $71,500.

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.

1(a). Schedule of expected cash collections:

1(b). Merchandise purchases budget:

1(c). Schedule of expected cash disbursements for merchandise purchases

Answer 1

EXPECTED CASH COLLECTIONS
			JAN	FEB	MARCH	QUARTER
Beginning Accounts receivable			202,400			202,400
Jan Month sales			77,600	310400		388,000
Feb Month Sales				117000	468000	585,000
March Month sales					59800	59,800
Total Cash Collections			280,000	427,400	527,800	1,235,200
PURCHASE BUDGET
			JAN	FEB	MARCH	QUARTER	APRIL
Budgeted Sales in $			388,000	585,000	299,000	1,272,000	196,000
Bdugeted Cost of goods sold(60%)			232,800	351,000	179,400	763,200	117,600
Add: Desired Ending Finished inventory			87,750	44,850	29,400	29,400
Total Needs			320,550	395,850	208,800	792,600
Less: Beginning Finished Inventory			58,200	87,750	44,850	58,200
Budgeted Purchase in $			262,350	308,100	163,950	734,400
EXPECTED CASH PAYMENTS
			JAN	FEB	MARCH	QUARTER
Beginning Accounts payable			86,025			86,025
Jan month Purchases			131175	131175		262,350
Feb Month Purchases				154050	154050	308,100
March month Purchases					81975	81,975
Total Cash disbursement			217,200	285,225	236,025	738,450