Question

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

Current assets as of March 31:

Cash $ 9,200

Accounts receivable $ 26,800

Inventory $ 49,800

Building and equipment, net $ 104,400

Accounts payable $ 29,925

Common stock $ 150,000

Retained earnings $ 10,275

The gross margin is 25% of sales.

Actual and budgeted sales data: March (actual) $ 67,000

April $ 83,000

May $ 88,000

June $ 113,000

July $ 64,000

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, $4,000 per month;

other expenses (excluding depreciation), 6% of sales.

Assume that these expenses are paid monthly. Depreciation is $783 per month (includes depreciation on new assets).

Equipment costing $3,200 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 following schedule:

Complete the following schedule:

	Schedule of Expected Cash Collections April May June Quarter Cash sales $49,800 Credit sales 26,800 Total collections $76,600 $0 $0 $0

2. Complete the following:

Complete the following:

Merchandise Purchases Budget April May June Quarter Budgeted cost of goods sold $62,250 $66,000 Add desired ending merchandise inventory 52,800 Total needs 115,050 66,000 0 0 Less beginning merchandise inventory 49,800 Required purchases $65,250 $66,000 $0 $0 Budgeted cost of goods sold for April = $83,000 sales × 75% = $62,250. Add desired ending inventory for April = $66,000 × 80% = $52,800. Schedule of Expected Cash Disbursements—Merchandise Purchases April May June Quarter March purchases $29,925 $29,925 April purchases 32,625 32,625 65,250 May purchases June purchases Total disbursements $62,550 $32,625 $0 $95,175

3. Complete the following cash budget:

Complete the following cash budget: (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Shilow Company Cash Budget April May June Quarter Beginning cash balance $9,200 Add collections from customers 76,600 Total cash available 85,800 0 0 0 Less cash disbursements: For inventory 62,550 For expenses 18,940 For equipment 3,200 Total cash disbursements 84,690 0 0 0 Excess (deficiency) of cash available over disbursements 1,110 0 0 0 Financing: Borrowings Repayments Interest Total financing 0 0 0 0 Ending cash balance $1,110 $0 $0 $0

4. Prepare an absorption costing income statement for the quarter ended June 30.

Prepare an absorption costing income statement for the quarter ended June 30.

	Shilow Company Income Statement For the Quarter Ended June 30 Cost of goods sold: 0 0 0 Selling and administrative expenses: 0 0 0

5. Prepare a balance sheet as of June 30.

repare a balance sheet as of June 30.

	Shilow Company Balance Sheet June 30 Assets Current assets: Total current assets 0 Total assets $0 Liabilities and Stockholders’ Equity Stockholders' equity: 0 Total liabilities and stockholders’ equity $0

Answer 1

Required Budgets are as prepared below:

Shillow Company
Schedule of expected Cash collections
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Sales	83,000	88,000	1,13,000	2,84,000	64,000
Beginning Accounts Receivable
March Credit sales (67,000*.4)	26,800			26,800
April Cash Sales	49,800			49,800
April Credit Sales		33,200		33,200
May Cash sales		52,800		52,800
May Credit Sales			35,200	35,200
June Cash sales			67,800	67,800
June Credit Sales				0
Total collections	76,600	86,000	1,03,000	2,65,600
Account receivable for June sale			45,200
Shillow Company
Merchandise Purchase Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Cost of goods sold	62,250	66,000	84,750	2,13,000	48,000
Add: Desired Ending merchandise inventory	52,800	67,800	38,400	38,400
Total needs	1,15,050	1,33,800	1,23,150	2,51,400
Less: beginning merchandise inventory	49,800	52,800	67,800	49,800
Required purchase	65,250	81,000	55,350	2,01,600
Shillow Company
Schedule of expected Cash payments
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Accounts Payable (a)	$29,925			$29,925
April Purchases (b)	$32,625	$32,625		$65,250
May Purchases (c )		$40,500	$40,500	$81,000
June Purchases (d)			$27,675	$27,675
Total payments (a+b+c+d)	$62,550	$73,125	$68,175	$2,03,850
Shillow Company
Cash Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Cash balance	9,200	4,110	4,145	9,200
Add: Collection from customers	$76,600	$86,000	$1,03,000	2,65,600
cash available for use	$85,800	$90,110	$1,07,145	$2,74,800
Less: cash Disbursements
Merchandise purchase	$62,550	$73,125	$68,175	2,03,850
Commissions (12% of sales)	9,960	10,560	13,560	34,080
Rent	4,000	4,000	4,000	12,000
Other exp (6% of sales)	4,980	5,280	6,780	17,040
Equipment purchase	3,200	0	0	3,200
Total disbusrement	84,690	92,965	92,515	2,70,170
Cash surplus/Deficit	1,110	-2,855	14,630	4,630
Financing
Borrowing	3,000	7,000		10,000
Repayment			-10,000	-10,000
Interest			-130	-130
Net cash from Financing	3,000	7,000	10,130	-130
Budgeted ending cash balance	4,110	4,145	4,500	4,500
Shillow Company
Budgeted Income Statement
For the quarter ended June 30
Particulars	Amount ($)	Amount ($)
Sales		2,84,000
Less: Cost of goods sold (75% of sales)		2,13,000
Gross margin		71,000
Less: Selling and administartive exp
Depreciation (783*3)	2,349
Commissions (12% of sales)	34,080
Rent	12,000
Other exp (6% of sales)	17,040	65,469
Net operating Income		5,531
Interest expense		130
Net Income		5,401
Shillow Company
Budgeted balance Sheet
Jun-30
Assets
Cash	4,500
Accounts Receivable	45,200
Inventory	38,400
Property and equipment Net	1,05,251
Total assets	1,93,351
Liabilities and Stockholders' Equity
Accounts Payable purchases	27,675
Common Stock	1,50,000
Retained earnings (10,275+5,391)	15,676
Total liabilities and stockholders' equity	1,93,351