Question

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

Current assets as of March 31:
Cash	$	8,000
Accounts receivable	$	20,000
Inventory	$	36,000
Building and equipment, net	$	120,000
Accounts payable	$	21,750
Common stock	$	150,000
Retained earnings	$	12,250

1. The gross margin is 25% of sales.

2. Actual and budgeted sales data:

March (actual)	$	50,000
April	$	60,000
May	$	72,000
June	$	90,000
July	$	48,000

3. 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.

4. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold.

5. 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.

6. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,500 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $900 per month (includes depreciation on new assets).

7. Equipment costing $1,500 will be purchased for cash in April.

8. 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 schedule of expected cash collections.

2. Complete the merchandise purchases budget and the schedule of expected cash disbursements for merchandise purchases.

3. Complete the cash budget.

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

5. Prepare a balance sheet as of June 30.

Answer 1

ANSWER :-

(1)

The schedule of expected collections is given below:

Schedule of Expected Collections
	April	May	June	Quarter
Cash Sales	36,000 (60,000*60%)	43,200 (72,000*60%)	54,000 (90,000*60%)	133,200 (
Credit Sales	20,000 (Given)	24,000 (60,000*40%)	28,800 (72,000*40%)	72,800
Total Collections	$56,000	$67,200	$82,800	$206,000

(2)

The merchandise purchases budget is given as follows:

Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted Cost of Goods Sold	45,000 (60,000*75%)	54,000 (72,000*75%)	67,500 (90,000*75%)	166,500
Add Desired Ending Inventory	43,200 (54,000*80%)	54,000 (67,500*80%)	28,800 (48,000*75%*80%)	28,800
Total Needs	88,200	108,000	96,300	195,300
Less Opening Inventory	36,000 (Given)	43,200 (54,000*80%)	54,000 (67,500*80%)	36,000
Required Purchases	$52,200	$64,800	$42,300	$159,300

(3)

The schedule of expected cash disbursements-merchandise purchases is given as follows:

	April	May	June	Quarter
March Purchases	21,750 (Given)	0	0	21,750
April Purchases	26,100 (52,200*50%)	26,100 (52,200*50%)	0	52,200
May Purchases	0	32,400 (64,800*50%)	32,400 (64,800*50%)	64,800
June Purchases	0	0	21,150 (42,300*50%)	21,150
Total Disbursements	$47,850	$58,500	$53,550	$159,900

(4)

The schedule of expected cash disbursements-selling and administrative expenses is given below:

Schedule of Expected Cash Disbursements – Selling and Administrative Expenses
	April	May	June	Quarter
Commissions	7,200 (60,000*12%)	8,640 (72,000*12%)	10,800 (90,000*12%)	26,640
Rent	2,500	2,500	2,500	7,500
Other Expenses	3,600 (60,000*6%)	4,320 (72,000*6%)	5,400 (90,000*6%)	13,320
Total Disbursements	$13,300	$15,460	$18,700	$47,460

(5)

The cash budget is given below:

Cash Budget
	April	May	June	Quarter
Opening Cash Balance	8,000	4,350	4,590	8,000
Add Cash Collections	56,000	67,200	82,800	206,000
Total Cash Available	64,000	71,550	87,390	214,000
Less Cash Disbursements
For Inventory	47,850	58,500	53,550	159,900
For Expenses	13,300	15,460	18,700	47,460
For Equipment	1,500	0	0	1,500
Total Cash Disbursements	62,650	73,960	72,250	208,860
Excess (Deficiency of Cash)	1,350	-2,410	15,140	5,140
Financing:
Borrowings	3,000	7,000	0	10,000
Repayments	0	0	-10,000	-10,000
Interest	0	0	-230 (3,000*1%*3 + 7,000*1%*2)	-230
Total Financing	3,000	7,000	-10,230	-230
Closing Cash Balance	$4,350	$4,590	$4,910	$4,910

(6)

The absorption costing income statement is given below:

Shilow Company
Absorption Costing Income Statement for the Quarter Ended June 30
Sales (60,000 + 72,000 + 90,000)		222,000
Cost of Goods Sold
Beginning Inventory	36,000
Add Purchases	159,300
Goods Available for Sale	195,300
Less Ending Inventory	28,800	166,500
Gross Margin		55,500
Less Selling and Administrative Expenses
Commissions	26,640
Rent	7,500
Depreciation (900*3)	2,700
Other Expenses	13,320	50,160
Net Operating Income		5,340
Less Interest Expense		230
Net Income		$5,110

(7)

The balance sheet is given below:

Shilow Company
Balance Sheet
June 30
Assets			Liabilities and Equity
Current Assets:			Current Liabilities
Cash	4,910		Accounts Payable (42,300*50%)	21,150
Accounts Receivable (90,000*40%)	36,000		Total Current Liabilities		21,150
Inventory	28,800
Total Current Assets		69,710	Stockholder's Equity
			Capital Stock	150,000
Building and Equipment, Net (120,000 + 1,500 - 2,700)		118,800	Retained Earnings (12,250 + 5,110)	17,360	167,360
Total Assets		$188,510	Total Liabilities and Equity		$188,510

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