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:

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

	Debit				Credit
Cash	$	42,000
Accounts receivable		201,600
Inventory		58,050
Buildings and equipment (net)		352,000
Accounts payable					$	85,725
Common stock						500,000
Retained earnings						67,925
	$	653,650			$	653,650

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

December(actual)	$	252,000
January	$	387,000
February	$	584,000
March	$	298,000
April	$	195,000

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.

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

Monthly expenses are budgeted as follows: salaries and wages, $17,000 per month: advertising, $57,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,420 for the quarter.

Each month’s ending inventory should equal 25% of the following month’s 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 in the following month.

During February, the company will purchase a new copy machine for $1,200 cash. During March, other equipment will be purchased for cash at a cost of $71,000.

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

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:

*$387,000 sales × 60% cost ratio = $232,200.

†$350,400 × 25% = $87,600.

  

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

3. Cash budget. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

4. Prepare an absorption costing income statement for the quarter ending March 31.

5. Prepare a balance sheet as of March 31.

Answer 1

1.

Schedule of Expected Cash Collections
	January	February	March	1st Quarter
Sales $	387000	584000	298000
Cash sales (20%)	77400	116800	59600	253800
Credit sales (80%):
December sales	201600			201600
January sales		309600		309600
February sales			467200	467200
Expected cash collections $	279000	426400	526800	1232200

2-a.

Merchandise Purchases Budget
	January	February	March	1st Quarter	April
Sales	387000	584000	298000		195000
Cost of goods sold (60%)	232200	350400	178800	761400	117000
Desired ending inventory as percent of following month's cost of goods sold	25%	25%	25%
Ending inventory	87600	44700	29250	29250
Total required	319800	395100	208050	790650
Less: Beginning inventory	58050	87600	44700	58050
Budgeted merchandise purchases $	261750	307500	163350	732600

2-b.

Schedule of Expected Cash Disbursements for Merchandise Purchases
	January	February	March	1st Quarter
December purchases	85725			85725
January purchases	130875	130875		261750
February purchases		153750	153750	307500
March purchases			81675	81675
Expected cash disbursements $	216600	284625	235425	736650

3.

Cash Budget
	January	February	March	1st Quarter
Beginning cash balance $	42000	30440	50295	42000
Add collections from customers	279000	426400	526800	1232200
Total cash available	321000	456840	577095	1274200
Less cash disbursements:
Merchandise purchases	216600	284625	235425	736650
Salaries and wages	17000	17000	17000	51000
Advertising	57000	57000	57000	171000
Shipping (5% of sales)	19350	29200	14900	63450
Other expenses (3% of sales)	11610	17520	8940	38070
Purchase of new copy machine	0	1200	0	1200
Purchase of other equipment	0	0	71000	71000
Cash dividends	45000	0	0	45000
Total cash disbursements	366560	406545	404265	1177370
Excess of cash available over disbursements	-45560	50295	172830	96830
Financing:
Borrowings	76000	0	0	26000
Repayments	0	0	-76000	-26000
Interest	0	0	-2280	-2280
Total financing	76000	0	-78280	-2280
Ending cash balance $	30440	50295	94550	94550

Interest = $76000 x 1% x 3 months = $2280

4.

Hillyard Company
Absorption Costing Budgeted Income Statement
For the Quarter Ending March 31
Sales revenue		1269000
Cost of goods sold		761400
Gross profit		507600
Less: Expenses
Salaries and wages expense	51000
Advertising expense	171000
Shipping expense	63450
Other expenses	38070
Depreciation expense	42420
Interest expense	2280
Total expenses		368220
Net income $		139380

5.

Hillyard Company
Budgeted Balance Sheet
March 31
Assets
Cash	94550
Accounts receivable ($298000 x 80%)	238400
Inventory	29250
Buildings and equipment, net of depreciation	381780
($352000 + $1200 + $71000 - $42420)
Total assets $	743980
Liabilities and Stockholders' Equity
Accounts payable ($163350 x 50%)	81675
Common stock	500000
Retained earnings ($67925 + $139380 - $45000)	162305
Total liabilities and stockholders' equity $	743980