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: a. As of December 31 (the end of the prior quarter), the company's general ledger showed the following account balances: Cash Accounts receivable Inventory Buildings and equipment (net) Accounts payable Common stock 47,eee 285,600 5৪, ৪৪e 357,eee $ 87,225 see,eee 81,175 668,480 668,480 Retained earnings b. Actual sales for December and budgeted sales for the next four months are as follows: December (actual) January February March $257,eee $392,eee 589,eee $303,ee0 $200, eee April 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. (In other words, cost of goods sold is 60 % of sales.) e. Monthly expenses are budgeted as follows: salaries and wages, $22,000 per month: advertising. $62,000 per month; shipping, 5% of sales; other expenses, 3 % of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $43,220 for the quarter. f Each month's ending inventory should equal 25% of the following month's cost of goods sold. g. One-half of a month's inventory purchases is paid for in the month of purchase: the other half is paid in the following momth. h. During February. the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $73,500. i. During January. the company will declare and pay $45,000 in cash dividends. j. 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.

Answer 1

Answer to Part 1. Schedule of Expected Cash Collections January February 78400 117800 205600 313600 284000 431400 Cash Sales Collection from Credit Sales Total Cash Collections March 60600 471200 531800 Quarter 256800 990400 1247200 Budgeted Cost of goods sold Add: Desired Ending Inventory Total Needs Less: Beginning Inventory Required Purchases Answer to Part 2A. Merchandise Purchases Budget January February 235200 353400 88350 45450 323550 398850 58800 88350 264750 310500 March 181800 30000 211800 45450 166350 Quarter 770400 30000 800400 58800 741600 Cost of Goods Sold = Sales * 60% Cost Ratio Desired Ending Inventory, March = $200,000 * 60%* 25% = $30,000

Answer to Part 2B. Schedule of Expected Cash Disbursements - Merchandise Purchases January February March December Purchases 87225 January Purchases 132375 132375 February Purchases 155250 155250 March Purchases 83175 Total Cash Disbursements for Purchases 219600 D 287625 238425 Quarter 87225 264750 310500 83175 745650

Answer to Part 3. Hillyard Company Cash Budget January 47000 284000 331000 February 30040 431400 461440 March 40995 531800 572795 Quarter 47000 1247200 1294200 238425 219600 115360 287625 131120 1700 108240 73500 Beginning Cash Balance Add: Cash Collections Total Cash Available Less: Cash Disbursements Inventory Purchases Selling and Administrative Expenses Equipment Purchases Cash Dividends Total Cash Disbursements Excess (Deficiency) of Cash Financing: Borrowings Repayments Interest ($79,000 * 1%* 3) Total Financing Ending Cash Balance 745650 354720 75200 45000 1220570 73630 45000 379960 -48960 420445 40995 420165 152630 79000 0 -79000 -2370 -81370 71260 79000 -79000 -2370 -2370 71260 79000 30040 40995

Cash Disbursements for Selling and Administrative Expenses January February March Salaries and Wages 22000 22000 22000 Advertising 62000 62000 62000 Shipping 19600 29450 15150 Other Expenses 11760 17670 9090 Total Cash Disbursements for Selling and Administrative Expenses 115360 131120 108240 Quarter 66000 186000 64200 38520 354720

1284000 Answer to Part 4. Hillyard Company Income Statement For the Quarter Ended March 31 Sales Cost of Goods sold Beginning Inventory 58800 Purchases 741600 Goods available for Sale 800400 Ending Inventory -30000 Gross Margin Selling and Administrative Expenses: Salaries and Wages 66000 Advertising 186000 Shipping (5% of Sales) 64200 Other Expenses (3% of Sales) 38520 Depreciation 43220 Total Selling and Adminitrative Expenses Net Operating Income Interest Expense Net Income 770400 513600 397940 115660 2370 113290

Answer to Part 5. Hillyard Company Balance Sheet March 31 Assets Current Assets: Cash Accounts Receivable Inventory Total Current Assets Building and Equipment, Net Total Assets 71260 242400 30000 343660 388980 732640 83175 Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable Stockholders' Equity Common Stock 500000 Retained Earnings 149465 Total Stockholders' Equity Total Liabiltiies and Stockholders' Equity 649465 732640 Building and Equipment, Net = $357,000 + $1,700 + $73,500 - $43,220 = $388,980 Retained Earnings = $81,175 + $113,290 - $45,000 = $149,465