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 preparation of 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:

	Debits			Credits
Cash	$	49,000
Accounts receivable		224,000
Inventory		63,000
Buildings and equipment (net)		369,000
Accounts payable				$	95,000
Capital shares					500,000
Retained earnings					110,000
	$	705,000		$	705,000

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

December (actual)	$	280,000
January		420,000
February		680,000
March		310,000
April		220,000

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.
e.	Monthly expenses are budgeted as follows: salaries and wages, $25,000 per month; advertising, $68,000 per month; shipping, 5% of sales; depreciation, $15,000 per month; other expenses, 3% of sales.
f.	At the end of each month, inventory is to be on hand equal to 25% of the following month’s sales needs, stated at cost.
g.	One-half of a month’s inventory purchases are paid for in the month of purchase; the other half are paid for in the following month.
h.	During February, the company will purchase a new copy machine for $1,500 cash. During March, other equipment will be purchased for cash at a cost of $81,500.
i.	During January, the company will declare and pay $45,000 in cash dividends.
j.	The company must maintain a minimum cash balance of $31,000. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month. Borrowings and repayments of principal must be in multiples of $1,000. Interest is paid only at the time of payment of principal. The annual interest rate is 12%. (Figure interest on whole months, e.g., 1/12, 2/12.)

Required:

Using the preceding data, complete the following statements and schedules for the first quarter:

1.	Schedule of expected cash collections.

      

2-a.	Inventory purchases budget.

          

2-b.	Schedule of cash disbursements for purchases.

          

3.	Schedule of cash disbursements for expenses.

      

4.	Cash budget. (Roundup "Borrowing" and "Repayments" answers to the nearest whole dollar amount. Any "Repayments" and "Interest" should be indicated by a minus sign.)

      

5.	Prepare an income statement for the quarter ending March 31.

      

6.	Prepare a balance sheet as of March 31.

      

Answer 1

1. Schedule of expeted cash collections

	January	February	March
Sales	420,000	680,000	310,000
Cash sales @ 20% (A)	84,000	136,000	62,000
Credit Sales @ 80%	336,000	544,000	248,000
Collection from debtors (Credit sales of previous month) (B)	224,000	336,000	544,000
Total cash collection (A+B)	308,000	472,000	606,000

2a Inventory purchase budget

	January	February	March	April
Sales (A)	420,000	680,000	310,000	220,000
Gross Margin (Sales*40%) (B)	168,000	272,000	124,000	88,000
Cost of inventory to be consumed (C=A-B)	252,000	408,000	186,000	132,000
Opening inventory (D) (25%of current month consumption)	63,000	102,000	46,500
Closing Inventory (E) (25% of next month consumption)	102,000	46,500	33,000
Purchases (F=C+E-D)	291,000	352,500	172,500

2b Schedule of cash disbursements for purchases

	January	February	March
Purchases	291,000	352,500	172,500
Cash Puchases @50% (a)	145,500	176,250	86,250
Credit Purchases @50%	145,500	176,250	86,250
Payment to creditors (b)	95,000	145,500	176,250
Total disbursements (a+b)	240,500	321,750	262,500

3 Schedule of cash disbursement for expenses

	January	February	March
Salaries and wages	25,000	25,000	25,000
Advertising	68,000	68,000	68,000
Shipping (5% of sales)	21,000	34,000	15,500
Depreciation	15,000	15,000	15,000
Other Expenses (3% of sales)	12,600	20,400	9,300
Total	141,600	162,400	132,800

4. Cash Budget

	January	February	March
Cash collection from Sales and debtors (1)	308,000	472,000	606,000
Total collection (A)	308,000	472,000	606,000
Cash disbursments for purchases (2b)	240,500	321,750	262,500
Payment of expenses (3) excluding depreciation	126,600	147,400	117,800
Payment of dividend	45,000
Purchase of new copy machine		1,500
Purchase of office equipment			81,500
Total payments (B)	412,100	470,650	461,800
Net cash (A-B)	-104,100	1,350	144,200
Opening Cash	49,000	31,900	31,210
Borrowing at the beginning of the month	87,000		-
Repayment		-2000	-85,000
Interest (Note below)		-40	-2,550
Closing Cash	31,900	31,210	42,130

Interest= 2,000*12%*2/12= 40

85,000*12%*3/12= 2550

5 Income statement fo the quarter ended March 31

	January	February	March	Total
Sales	420,000	680,000	310,000	1,410,000
Total Revenue	420,000	680,000	310,000	1,410,000
Inventory consumed	252,000	408,000	186,000	846,000
Salaries and Wages	25,000	25,000	25,000	75,000
Advertisement	68,000	68,000	68,000	204,000
Shipping	21,000	34,000	15,500	70,500
Depreciation	15,000	15,000	15,000	45,000
Others	12,600	20,400	9,300	42,300
Dividend	45,000			45,000
Interest			2,590	2,590
Total Expenses	438.600	570,400	321,390	1,330,390
Profit	-18,600	109,600	-11,390	79,610

6. Balance Sheet as of march 31

	Debit	Credit
Cash	87,860
Accounts Receivable	248,000
Inventory	33,000
Building and equipment (net)	324,000
New copy machine	1,500
Office equipment	81,500
Accounts payable		86,250
Capital Shares		500,000
Retained Earnings		189,610
	775,860	775,860