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:

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

		Debits		Credits
Cash	$	45,000
Accounts receivable		204,000
Inventory		58,500
Buildings and equipment (net)		355,000
Accounts payable			$	86,625
Common stock				500,000
Retained earnings				75,875
	$	662,500	$	662,500

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

December (actual)	$	255,000
January	$	390,000
February	$	587,000
March	$	301,000
April	$	198,000

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, $20,000 per month: advertising, $60,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,900 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 $1,500 cash. During March, other equipment will be purchased for cash at a cost of $72,500.

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	Feburary	March	Quarter
Cash sales			78000	117400	60200	255600
Credit sales			204,000	312000	469600	985,600
total collections			282000	429400	529800	1241200
Accounts receivable at march 31= 312,000*80%=240,800
2-a)		Merchandise purchase budget
			January	Feburary	March	Quarter		April
budgeted cost of goods sold			234000	352200	180600	766800		118800
Add:Ending inventory			88050	45150	29700	29,700
total needs			322050	397350	210300	796500
less Beginning inventory			58,500	88,050	45,150	58,500
Required purchases			263,550	309,300	165,150	738,000
2-b)	Schedule of Expected cash disbursement for Merchandise purchase
			January	Feburary	March	Quarter
December purchases			86,625			86,625
january purchases			131775	131775		263550
Feburary purchases				154650	154650	309300
march purchases					82575	82575
total cash disbursement for purchases			218,400	286425	237225	742,050
Accounts payable=		82,575
3)			Cash budget
			January	Feburary	March	Quarter
Beginning cash balance			45,000	30,400	44915	45,000
Add cash collections			282000	429400	529800	1241200
total cash available			327,000	459800	574715	1,286,200
less cash disbursements
purchase of inventory			218,400	286425	237225	742,050
selling and adm expense			111200	126960	104080	342240
purchase of equipment			0	1,500	72,500	74000
cash dividends			45,000	0	0	45,000
total cash disbursement			374,600	414885	413805	1,203,290
Excess(Deficiency) of cash			-47,600	44915	160910	82,910
Financing
Borrowings			78,000	0	0	78,000
Repayments			0	0	-78,000	-78000
interest			0	0	-2,340	-2340
total financing			78,000	0	-80340	-2,340
ending cash balance			30,400	44915	80570	80,570
	interest expense = 78000*1%*3
			2340
4)			income statememt
Sales						1278000
cost of goods sold
Beginning invnetory				58,500
Add purchases				738,000
cost of goods avaialble				796,500
less ending inventory				29,700		766,800
Gross profit						511,200
Selling and administrative exp
Salaries and wages				60,000
Advertising				180,000
shiiping 5% of sales				63900
other expense 3% of sales				38340
Depreciation				42,900		385,140
operating income						126,060
less interest expense						2,340
Net income						123,720
5)		Balance sheet
Asses
current assets
cash						80570
Account receivable						240,800
inventory						29,700
total current assets						351,070
buildings and Equipment (net)			(365000+2500+77500-44500)			386,100
total assets						737,170
liabilities & stockholders Equity
current liabilities
Accounts payable						82,575
total current liabilities						82,575
Stockholders Equity
common stock						500,000
Retained earnings		(86,475+102830-45000)				154,595
total stockholders equity						654,595
total liabilities & stockholders equity						737,170