Question

Problem 8-29 Completing a Master Budget [LO8-2, LO8-4, LO8-7, LO8-8, LO8-9, LO8-10]

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

Current assets as of March 31:
Cash	$	7,400
Accounts receivable	$	19,600
Inventory	$	39,000
Building and equipment, net	$	126,000
Accounts payable	$	23,175
Common stock	$	150,000
Retained earnings	$	18,825

The gross margin is 25% of sales.

Actual and budgeted sales data:

March (actual)	$	49,000
April	$	65,000
May	$	70,000
June	$	95,000
July	$	46,000

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, $2,200 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $945 per month (includes depreciation on new assets).

Equipment costing $1,400 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 (Expected Cash Collection):

2. Complete the following (Merchandise Purchase Budget and Schedule of Expected cash disbursments - Merchandise Purchase Budget) :

3. Complete the following cash budget:

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

Answer 1

1)			Shilow company
			Schedule of Expected cash collections
			April	May	June	Quarter
Cash sales			39000	42000	57000	138000
credit sales			19,600	26000	28000	73,600
total collections			58600	68000	85000	211600
	Accounts receivable = 95000*40%=				38000
2)			Merchandise purchase budget
			April	May	June	Quarter
Budgeted cost of goods sold			48750	52500	71250	172500		34500
Add Desired ending inventory			42000	57000	27,600	27,600
total needs			90750	109500	98850	200100
less beginning inventory			39,000	42,000	57,000	39,000
Required purchases			51,750	67,500	41,850	161,100
		cost of goods sold = 75% of sales
		ending inventory = 80% of following months budgeted cost of goods sold
3)		Schedule of Cash disbursements-Merchandise purhcase
			April	May	June	Quarter
March purchases			23,175			23,175
April purchases			25875	25,875		51750
May purchases				33750	33,750	67500
June purchases					20925	20925
total disbursements			49,050	59625	54675	163,350
	Accounts payable june 30 = 20,925
4)			Cash budget
			April	May	June	Quarter
Beginning cash balance			7,400	4,650	4,225	7,400
Add Cash collectiosn			58600	68000	85000	211600
total cas h available			66,000	72,650	89,225	219,000
less cash disbursements
for inventory			49,050	59625	54675	163,350
for expenses			13900	14800	19300	48000
for equipment			1,400	0	0	1,400
total cash disbursements			64,350	74425	73975	212,750
Excess(Deficiency)of cash			1,650	-1,775	15,250	6,250
Financing:
Borrowings			3,000	6,000	0	9,000
Repayments			0		-9,000	-9,000
interest			0		-210	-210
total financing			3,000	6,000	-9210	-210
Ending cash balance			4,650	4,225	6,040	6,040
	interest = 3000*1%*3=			90
		6000*1%*2=		120
				210
5)			income statement
	Sales					230000
	cost of goods sold
	Beginning inventor				39,000
	Add purchases				161,100
	goods available for sale				200,100
	ending inventory				27,600	172,500
	Gross margin					57,500
	Selling and administrative expense
	commissions				27600
	rent				6600
	Depreciation		(945*3)		2835
	other expenses				13800	50835
	net operating					6,665
	interest expense					210
	net income					6,455
		Balance sheet
		Assets
		current assets
		Cash					6,040
		Accounts receivable					38,000
		inventory					27,600
		total current assets					71,640
		Building And equipment ,net (126000+1400-2835)					124565
		total Assets					196,205
		liabilities And stockholder 's Equity
		Accounts payable					20,925
		total current assets					20,925
		Stockholder's Equity
		Capital stock				150,000
		Retained earnings(18,825+6455)				25280	175,280
		total liabilites & stockholders Equity					196,205