Question

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:

Current assets as of March 31:
Cash	$	7,400
Accounts receivable	$	19,600
Inventory	$	39,000
Building and equipment, net	$	126,000
Accounts payable	$	23,175
Common stock	$	150,000
Retained earnings	$	18,825

The gross margin is 25% of sales.

Actual and budgeted sales data:

March (actual)	$	49,000
April	$	65,000
May	$	70,000
June	$	95,000
July	$	46,000

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.

Each month’s ending inventory should equal 80% of the following month’s budgeted 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 for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.

Monthly expenses are as follows: commissions, 12% of sales; rent, $2,200 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $945 per month (includes depreciation on new assets).

Equipment costing $1,400 will be purchased for cash in April.

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 preceding data:

1. Complete the following schedule:

2. Complete the following:

3. Complete the following cash budget:

4. Prepare an absorption costing income statement for the quarter ended June 30.

Complete the following schedule:

	Schedule of Expected Cash Collections April May June Quarter Cash sales $39,000 $42,000 $57,000 $138,000 Credit sales 19,600 26,000 28,000 73,600 Total collections $58,600 $68,000 $85,000 $211,600

Merchandise Purchases Budget April May June Quarter Budgeted cost of goods sold $48,750 $52,500 $71,250 $172,500 Add desired ending merchandise inventory 42,000 57,000 27,600 27,600 Total needs 90,750 109,500 98,850 200,100 Less beginning merchandise inventory 39,000 42,000 57,000 39,000 Required purchases $51,750 $67,500 $41,850 $161,100 Budgeted cost of goods sold for April = $65,000 sales × 75% = $48,750. Add desired ending inventory for April = $52,500 × 80% = $42,000. Schedule of Expected Cash Disbursements—Merchandise Purchases April May June Quarter March purchases $23,175 $23,175 April purchases 25,875 25,875 51,750 May purchases 33,750 33,750 67,500 June purchases 20,925 20,925 Total disbursements $49,050 $59,625 $54,675 $163,350

Complete the following cash budget: (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Shilow Company Cash Budget April May June Quarter Beginning cash balance $7,400 $7,400 Add collections from customers 58,600 68,000 85,000 211,600 Total cash available 66,000 68,000 85,000 219,000 Less cash disbursements: For inventory 49,050 59,625 54,675 163,350 For expenses 13,900 14,800 19,300 48,000 For equipment 1,400 1,400 Total cash disbursements 64,350 74,425 73,975 212,750 Excess (deficiency) of cash available over disbursements 1,650 (6,425) 11,025 6,250 Financing: Borrowings Repayments Interest Total financing 0 0 0 0 Ending cash balance $1,650 $(6,425) $11,025 $6,250

Prepare an absorption costing income statement for the quarter ended June 30.

Shilow Company Income Statement For the Quarter Ended June 30 Sales $230,000 Cost of goods sold: Beginning inventory 39,000 Purchases 161,100 Goods available for sale 200,100 Ending inventory 27,600 172,500 Gross margin 57,500 Selling and administrative expenses: Commissions 27,600 Rent 6,600 Depreciation 2,835 Other expenses 13,800 50,835 Net operating income 6,665 Interest expense Net income 6,665

Answer 1

Shilow Company
Cash Budget
	April	May	June	Quarter
Beginning cash balance $	7400	4650	4225	7400
Add collections from customers	58600	68000	85000	211600
Total cash available	66000	72650	89225	219000
Less cash disbursements:
For inventory	49050	59625	54675	163350
For expenses	13900	14800	19300	48000
For equipment	1400	0	0	1400
Total cash disbursements	64350	74425	73975	212750
Excess (deficiency) of cash available over disbursements	1650	-1775	15250	6250
Financing:
Borrowings	3000	6000	0	9000
Repayments	0	0	-9000	-9000
Interest	0	0	-210	-210
Total financing	3000	6000	-9210	-210
Ending cash balance $	4650	4225	6040	6040

Interest = ($3000 x 1% x 3) + ($6000 x 1% x 2) = $90 + $120 = $210

Shilow Company
Income Statement
For the Quarter Ended June 30
Net operating income		6665
Interest expense		210
Net income		6455

Note: All amounts in the cash budget and income statement have been taken as provided except for the financing section and its relevant effects which have been completed. Only relevant portion of the income statement has been shown above.