Question

Problem 8-31 Completing a Master Budget [LO8-2, LO8-4, LO8-7, LO8-8, LO8-9, LO8-10]

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:

 

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

 

		Debits		Credits
Cash	$	64,000
Accounts receivable		219,200
Inventory		61,350
Buildings and equipment (net)		374,000
Accounts payable			$	92,325
Common stock				500,000
Retained earnings				126,225
	$	718,550	$	718,550

 

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

 

December (actual)	$	274,000
January	$	409,000
February	$	606,000
March	$	321,000
April	$	217,000

 

3. 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.

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

5. Monthly expenses are budgeted as follows: salaries and wages, $39,000 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 $45,940 for the quarter.

6. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.

7. 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.

8. During February, the company will purchase a new copy machine for $3,400 cash. During March, other equipment will be purchased for cash at a cost of $82,000.

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

10. 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:

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

3. Cash budget:

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	Quarter
Cash Sales	$    79,400	$   1,18,800	$    61,600	$   2,59,800
Credit Sales	$ 2,09,600	$   3,17,600	$ 4,75,200	$ 10,02,400
Total Collections	$ 2,89,000	$   4,36,400	$ 5,36,800	$ 12,62,200

(2a)

Merchandise Purchases Budget
	January	February	March	Quarter
Budgeted Cost of goods sold	$ 2,38,200	$   3,56,400	$ 1,84,800	$   7,79,400
Add desired ending inventory	$    89,100	$      46,200	$    30,750	$      30,750
Total needs	$ 3,27,300	$   4,02,600	$ 2,15,550	$   8,10,150
Less beginning inventory	$    59,550	$      89,100	$    46,200	$      59,550
Required purchases	$ 2,67,750	$   3,13,500	$ 1,69,350	$   7,50,600

(2b)

Schedule of Expected Cash Disbursement
	January	February	March	Quarter
December Purchases	$    88,725			$      88,725
January Purchases	$ 1,33,875	$   1,33,875		$   2,67,750
February Purchases		$   1,56,750	$ 1,56,750	$   3,13,500
March Purchases			$    84,675	$      84,675
Total Cash disbursements for purhcases	$ 2,22,600	$   2,90,625	$ 2,41,425	$   7,54,650

(3)

Cash Budget
	January	February	March	Quarter
Beginning Cash Balance	$    52,000	$      30,640	$    32,695	$      52,000
Add Cash Collections	$ 2,89,000	$   4,36,400	$ 5,36,800	$ 12,62,200
Total cash available	$ 3,41,000	$   4,67,040	$ 5,69,495	$ 13,14,200
Less cash disbursements:
Purchases of inventory	$ 2,22,600	$   2,90,625	$ 2,41,425	$   7,54,650
Selling and administrative expenses	$ 1,25,760	$   1,41,520	$ 1,18,640	$   3,85,920
Purchases of equipment		$        2,200	$    76,000	$      78,200
Cash dividends	$    45,000			$      45,000
Total cash disbursements	$ 3,93,360	$   4,34,345	$ 4,36,065	$ 12,63,770
Excess (deficiency) of cash	$ -52,360	$      32,695	$ 1,33,430	$      50,430
Financing:
Borrowings	$    83,000	0	0	$      83,000
Repayments	0	0	$ -83,000	$     -83,000
Interest	0	0	$     -2,490	$       -2,490
Total financing	$    83,000	0	$ -85,490	$       -2,490
Ending cash balance	$    30,640	$      32,695	$    47,940	$      47,940

Explanations:

Selling and administrative expenses
	January	February	March	Quarter
Salaries & Wages	$    27,000	$      27,000	$    27,000	$      81,000
Advertising	$    67,000	$      67,000	$    67,000	$   2,01,000
Shipping	$    19,850	$      29,700	$    15,400	$      64,950
Other expenses	$    11,910	$      17,820	$      9,240	$      38,970
	$ 1,25,760	$   1,41,520	$ 1,18,640	$   3,85,920

(4)

Income Statement
For the Quarter Ended March 31
Sales		$ 12,99,000
Cost of goods sold:
Beginning Inventory	$    59,550
Purchases	$ 7,50,600
Goods available for sale	$ 8,10,150
Ending inventory	$    30,750	$   7,79,400
Gross margin		$   5,19,600
Selling and administrative expenses:
Salaries and wages	$    81,000
Advertising	$ 2,01,000
Shipping	$    64,950
Depreciation	$    44,020
Other expenses	$    38,970
		$   4,29,940
Net operating income		$      89,660
Interest expense		$        2,490
Net income		$      87,170

(5)

Balance Sheet
March 31
Assets
Current Assets:
Cash		$      47,940
Accounts receivable ($308000 * 80%)		$   2,46,400
Inventory		$      30,750
Total Current assets		$   3,25,090
Building & Equipment, net ($362000 + $2200 + $76000 - $44020)		$   3,96,180
Total assets		$   7,21,270
Liabilities & Stockholders' Equity
Current Liabilities:
Accounts Payable		$      84,675
Stockholders' Equity:
Common Stock	$ 5,00,000
Retained Earnings ($94425 + $87170 - $45000)	$ 1,36,595
		$   6,36,595
Total liabilities & stockholders' equity		$   7,21,270