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:

1. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

Cash	$	47,000
Accounts receivable		205,600
Inventory		58,800
Buildings and equipment (net)		357,000
Accounts payable			$	87,225
Common stock				500,000
Retained earnings				81,175
	$	668,400	$	668,400

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

December(actual)	$	257,000
January	$	392,000
February	$	589,000
March	$	303,000
April	$	200,000

3. 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.

4. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

5. 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.

6. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.

7. 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.

8. 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.

9. During January, the company will declare and pay $45,000 in cash dividends.

10. 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.

Required:

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

1. Schedule of expected cash collections:

2-a. Merchandise purchases budget:

2-b. Schedule of expected cash disbursements for merchandise purchases:

Answer 1

1) Schedule of expected cash collections Schedule of expected cash collections February 78,400 $ January March Quarter From cash sales (Current month Sales *20%) From credit sales (Previous month sales *80%) Total cash Collections 117,800 $ ($392000*20%) ($589000*20%)($303000* 20% ) 313,600 $ ($392000*80%) ($589000*80%) 60,600$ 256,800 205,600 $ |($257000 *80%) 284,000 471,200 990,400 $ 531,800 1,247,200 431,400 2 a) Mechandise purchase budget Mechandise purchase budget February 235,200 $ 88,350 $ Quarter 181,800 $ 30,000 $ ($353400 25%)($181800* 25%)($120000* 25%) March January Budgeted cost of goods sold Add Desired ending inventory (following month COGS *25%) Total Inventory required Less : Beginning inventory Required purchases 353,400$ 770,400 45,450 30,000 323,550 $ (58,800) $ 398,850 $ (88,350) $ 310,500 $ 211,800 $ (45,450) $ 166,350 $ 800,400 (58,800) 264,750 741,600 Note Ending inventory of a particular month is the beginning inventory of the following month or next month Beginning inventory for the month of January is taken from the Balance sheet inventory value.

Working Notes Cost of Goods Sold Cost of Goods Sold April 303,000 200,000 (121,200) (80,000) 181,800 120,000 January February 392,000 $ (156,800) $ 235,200 $ March Sales Less Gross margin( sales*40%) Cost of Goods Sold 589,000 (235,600) $ 353,400$ Schedule of expected cash disbursments for mechandise purchases 2 b) Schedule of expected cash disbursments for mechandise purchases February 87,225 $ January March Quarter December purchases |January purchases $ $ 87,225 132,375 $ $ 264,750 $ 132,375 ($ 264750 50 %) ($ 264750 *50 %) February purchases 155,250 $ ($310500*50%)($310500*50%) 83,175 $ ($166350*50%) 155,250 $ $ 310,500 March purchases 83,175 Total cash payments for purchases 287,625$ 219,600 $ 238,425 $ 745,650