Question

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

Current assets as of March 31:
Cash	$	7,700
Accounts receivable	$	20,800
Inventory	$	40,800
Building and equipment, net	$	129,600
Accounts payable	$	24,300
Common stock	$	150,000
Retained earnings	$	24,600

The gross margin is 25% of sales.

1. Actual and budgeted sales data:

March (actual)	$	52,000
April	$	68,000
May	$	73,000
June	$	98,000
July	$	49,000

c.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.

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

4. 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.

5. 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 $972 per month (includes depreciation on new assets).

6. Equipment costing $1,700 will be purchased for cash in April.

7. 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.

Answer 1

(1)

The schedule of expected collections is given below:

Schedule of Expected Collections
	April	May	June	Quarter
Cash Sales	40,800 (68,000*60%)	43,800 (73,000*60%)	58,800 (98,000*60%)	143,400
Credit Sales	20,800 (Given)	27,200 (68,000*40%)	29,200 (73,000*40%)	77,200
Total Collections	$61,600	$71,000	$88,000	$220,600

2)

The merchandise purchases budget is given as follows:

Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted Cost of Goods Sold	51,000 (68,000*75%)	54,750 (73,000*75%)	73,500 (98,000*75%)	179250
Add Desired Ending Inventory	43,760 (54,700*80%)	58,800 (73,500*80%)	29,400 (49,000*75%*80%)	29,400
Total Needs	94,760	113,550	102,900	208650
Less Opening Inventory	40,800 (Given)	43,760 (54,700*80%)	58,800 (73,500*80%)	40,800
Required Purchases	$53,960	$69,790	$44100	$167850

3)

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

	April	May	June	Quarter
March Purchases	24,300 (Given)	0	0	24,300
April Purchases	26,980 (53,960*50%)	26,980 (53,960*50%)	0	53,960
May Purchases	0	34,895 (69,790*50%)	34,895 (69,790*50%)	69,790
June Purchases	0	0	22,050 (44,100*50%)	22,050
Total Disbursements	$51,280	$61,875	$56,945	$170,100

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	8,160 (68,000*12%)	8,760 (73,000*12%)	11,760 (98,000*12%)	28,680
Rent	2,500	2,500	2,500	7,500
Other Expenses	4,080 (68,000*6%)	4,380 (73,000*6%)	5,880 (98,000*6%)	14340
Total Disbursements	$14,740	$15,640	$20,140	$50,520

5)

The cash budget is given below:

Cash Budget
	April	May	June	Quarter
Opening Cash Balance	7,700	4,580	5,245	17525
Add Cash Collections	61,600	71,000	88,000	220,600
Total Cash Available	69,300	75,580	93,245	238,125
Less Cash Disbursements
For Inventory	51,280	61,875	56,945	170,100
For Expenses	14,740	15,460	20,140	50,340
For Equipment	1,700	0	0	1,700
Total Cash Disbursements	67,720	77,335	77,085	222,140
Excess (Deficiency of Cash)	1,580	-1,755	16,160	15985
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	$4,580	$5,245	$5,930	$5,930

6)

The absorption costing income statement is given below:

Shilow Company
Absorption Costing Income Statement for the Quarter Ended June 30
Sales (68,000 + 73,000 + 98,000)		239,000
Cost of Goods Sold
Beginning Inventory	40,800
Add Purchases	167,850
Goods Available for Sale	208,650
Less Ending Inventory	(29,400)	179250
Gross Margin		59,750
Less Selling and Administrative Expenses
Commissions	28,680
Rent	7,500
Depreciation (972*3)	2,916
Other Expenses	14,340	53,436
Net Operating Income		6,314
Less Interest Expense		230
Net Income		$6,084

7)

The balance sheet is given below:

Shilow Company
Balance Sheet
June 30
Assets	Liabilities and Equity
Current Assets:			Current Liabilities
Cash	5,930		Accounts Payable (44,100*50%)	22,050
Accounts Receivable (98,000*40%)	39,200		Total Current Liabilities		22,050
Inventory	29,400
Total Current Assets		74530	Stockholder's Equity
			Capital Stock	150,000
Building and Equipment, Net (129,600 + 1,700 - 2,916 )		128,384	Retained Earnings (24,600 + 6,084)	30,684	180,864
Total Assets		$202,914	Total Liabilities and Equity		$202,914