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	$	46,000
Accounts receivable		204,800
Inventory		58,650
Buildings and equipment (net)		356,000
Accounts payable			$	86,925
Common stock				500,000
Retained earnings				78,525
	$	665,450	$	665,450

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

December (actual)	$	256,000
January	$	391,000
February	$	588,000
March	$	302,000
April	$	199,000

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, $21,000 per month: advertising, $61,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $43,060 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 $1,600 cash. During March, other equipment will be purchased for cash at a cost of $73,000.

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	Feburary	March	Quarter
Cash sales			78200	117600	60400	256200
Credit sales			204,800	312800	470400	988,000
total collections			283000	430400	530800	1244200
Accounts receivable at march 31= 302,000*80%=241,600
2-a)		Merchandise purchase budget
			January	Feburary	March	Quarter
budgeted cost of goods sold			234600	352800	181200	768600
Add:Ending inventory			88200	45300	29850	29,850
total needs			322800	398100	211050	798450
less Beginning inventory			58,650	88,200	45,300	58,650
Required purchases			264,150	309,900	165,750	739,800
2-b)	Schedule of Expected cash disbursement for Merchandise purchase
			January	Feburary	March	Quarter
December purchases			86,925			86,925
january purchases			132075	132075		264150
Feburary purchases				154950	154950	309900
march purchases					82875	82875
total cash disbursement for purchases			219,000	287025	237825	743,850
Accounts payable=		82,875
3)			Cash budget
			January	Feburary	March	Quarter
Beginning cash balance			46,000	30,720	43455	46,000
Add cash collections			283000	430400	530800	1244200
total cash available			329,000	461120	574255	1,290,200
less cash disbursements
purchase of inventory			219,000	287025	237825	743,850
selling and adm expense			113280	129040	106160	348480
purchase of equipment			0	1,600	73,000	74600
cash dividends			45,000	0	0	45,000
total cash disbursement			377,280	417665	416985	1,211,930
Excess(Deficiency) of cash			-48,280	43455	157270	78,270
Financing
Borrowings			79,000	0	0	79,000
Repayments			0	0	-79,000	-79000
interest			0	0	-2,370	-2370
			0	0	0	0
total financing			79,000	0	-81370	-2,370
ending cash balance			30,720	43455	75900	75,900
	interest expense = 79000*1%*3
			2370
4)			income statememt
Sales						1281000
cost of goods sold
Beginning invnetory				58,650
Add purchases				739,800
cost of goods avaialble				798,450
less ending inventory				29,850		768,600
Gross profit						512,400
Selling and administrative exp
Salaries and wages				63,000
Advertising				183,000
shiiping 5% of sales				64050
other expense 3% of sales				38430
Depreciation				43,060		391,540
operating income						120,860
less interest expense						2,370
Net income						118,490
5)		Balance sheet
Asses
current assets
cash						75900
Account receivable						241,600
inventory						29,850
total current assets						347,350
buildings and Equipment (net)						387,540
total assets						734,890
liabilities & stockholders Equity
current liabilities
Accounts payable						82,875
total current liabilities						82,875
Stockholders Equity
common stock						500,000
Retained earnings						152,015
total stockholders equity						652,015
total liabilities & stockholders equity						734,890