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 $ 22,000 Inventory $ 42,600 Building and equipment, net $ 130,800 Accounts payable $ 25,425 Common stock $ 150,000 Retained earnings $ 27,975 The gross margin is 25% of sales. Actual and budgeted sales data: March (actual) $ 55,000 April $ 71,000 May $ 76,000 June $ 101,000 July $ 52,000 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, $2,800 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $981 per month (includes depreciation on new assets). Equipment costing $2,000 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 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 to Part 1. | | Cash Sales Collection from Credit Sales Total Cash Collections Schedule of Expected Cash Collections April May 42600 45600 22000 28400 64600 74000 June 60600 30400 91000 Quarter 148800 80800 229600 Answer to Part 2 Budgeted Cost of goods sold Add: Desired Ending Inventory Total Needs Less: Beginning Inventory Required Purchases Merchandise Purchases Budget April May 53250 57000 45600 60600 98850 117600 42600 45600 56250 72000 June 75750 31200 106950 60600 46350 Quarter 186000 31200 217200 42600 174600 Schedule of Expected Cash Disbursements - Merchandise Purchases April May June March Purchases 25425 April Purchases 28125 28125 May Purchases 36000 36000 June Purchases 23175 Total Disbursements 53550 64125 59175 Quarter 25425 56250 72000 23175 176850 June Cash Disbursements for Expenses April May Commission 8520 9120 Rent 2800 2800 Other Expenses 4260 4560 Total Cash Disbursements for Expenses 15580 16480 12120 2800 6060 20980 Quarter 29760 8400 14880 53040

April 8000 64600 72600 May 4470 74000 78470 June 4865 91000 95865 Quarter 8000 229600 237600 64125 59175 Answer to Part 3. Cash Budget Beginning Cash Balance Add: Cash Collections Total Cash Available Less: Cash Disbursements For Inventory For Equipment For Expenses Total Cash Disbursements Excess (Deficiency) of Cash Financing: Borrowings Repayments Interest Total Financing Ending Cash Balance 53550 2000 15580 71130 1470 16480 80605 -2135 20980 80155 15710 176850 2000 53040 231890 5710 3000 7000 0 0 7000 4865 -10000 -230 -10230 5480 10000 -10000 -230 -230 5480 3000 44 70

Income Statement 248000 Answer to Part 4. Shilow Company Income Statement For the Quarter Ended June 30 Sales Cost of Goods sold Beginning Inventory 42600 Purchases 174600 Goods available for Sale 217200 Ending Inventory 31200 Cost of Goods sold Gross Profit Selling and Administrative Expenses: Commission 29760 Rent 8400 Other Expenses 14880 Depreciation 2943 Total Selling and Adminitrative Expenses Net Operating Income Interest Expense Net Income 186000 62000 55983 6017 230 5787

Answer to Part 5. Shilow Company Balance Sheet June 30 Assets Current Asstes: Cash 5480 Accounts Receivable 40400 Inventory 31200 Total Current Assets Building and Equipment, net Total Assets Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable Stockholders' Equity: Common Stock 150000 Retained Earnings 33762 Total Stockholders' Equity Total Liabilities and Stockholders' Equity 77080 129857 206937 23175 183762 206937