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:
As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:
|
Debit |
Credit |
||||||
|
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 |
||||
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 |
|
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.
The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)
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.
Each month’s ending inventory should equal 25% of the following month’s 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 in the following month.
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.
During January, the company will declare and pay $45,000 in cash dividends.
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:
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2-a. Merchandise purchases budget
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*$391,000 sales × 60% cost ratio = $234,600.
†$352,800 × 25% = $88,200.
2-b. Schedule of expected cash disbursements for merchandise purchases:
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3. Cash budget. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
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4. Prepare an absorption costing income statement for the quarter
ending March 31.
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5. Prepare a balance sheet as of March 31.
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| January | February | March | Quarter | |
| Sales | $ 391,000.00 | $ 588,000.00 | $ 302,000.00 | $ 1,281,000.00 |
| Cash Sales 20% | $ 78,200.00 | $ 117,600.00 | $ 60,400.00 | $ 256,200.00 |
| Credit Sales | $ 312,800.00 | $ 470,400.00 | $ 241,600.00 | $ 1,024,800.00 |
| Schedule of Expected Cash Collections | ||||
| January | February | March | Quarter | |
| Cash sales | $ 78,200.00 | $ 117,600.00 | $ 60,400.00 | $ 256,200.00 |
| Credit sales of last month 80% | $ 204,800.00 | $ 312,800.00 | $ 470,400.00 | $ 988,000.00 |
| Total collections | $ 283,000.00 | $ 430,400.00 | $ 530,800.00 | $ 1,244,200.00 |
| Merchandise Purchases Budget | ||||
| January | February | March | Quarter | |
| Budgeted cost of goods sold 60% of sales | $ 234,600.00 | $ 352,800.00 | $ 181,200.00 | $ 768,600.00 |
| Add desired ending inventory 25% of next month's cost of goods sold | $ 88,200.00 | $ 45,300.00 | $ - | $ - |
| Total needs | $ 322,800.00 | $ 398,100.00 | $ 181,200.00 | $ 798,450.00 |
| Less beginning inventory | $ 58,650.00 | $ 88,200.00 | $ 45,300.00 | $ 58,650.00 |
| Required purchases | $ 264,150.00 | $ 309,900.00 | $ 165,750.00 | $ 739,800.00 |
| Schedule of Expected Cash Disbursements for Merchandise Purchases | ||||
| January | February | March | Quarter | |
| December purchases | $ 86,925.00 | $ - | $ - | $ 86,925.00 |
| January purchases 50% each | $ 132,075.00 | $ 132,075.00 | $ - | $ 264,150.00 |
| February purchases 50% each | $ - | $ 154,950.00 | $ 154,950.00 | $ 309,900.00 |
| March purchases50% each | $ - | $ - | $ 82,875.00 | $ 82,875.00 |
| Total cash disbursements for purchases | $ 219,000.00 | $ 287,025.00 | $ 237,825.00 | $ 743,850.00 |
| Cash Budget | ||||
| January | February | March | Quarter | |
| Beginning cash balance | $ 46,000.00 | $ 30,720.00 | $ 43,455.00 | $ 46,000.00 |
| Add cash collections | $ 283,000.00 | $ 430,400.00 | $ 530,800.00 | $ 1,244,200.00 |
| Total cash available | $ 329,000.00 | $ 461,120.00 | $ 574,255.00 | $ 1,290,200.00 |
| Less cash disbursements: | ||||
| Purchases of inventory | $ 219,000.00 | $ 287,025.00 | $ 237,825.00 | $ 743,850.00 |
| Selling and administrative expenses | $ 113,280.00 | $ 129,040.00 | $ 106,160.00 | $ 348,480.00 |
| Purchases of equipment | $ 1,600.00 | $ 73,000.00 | $ 74,600.00 | |
| Cash dividends | $ 45,000.00 | $ - | $ - | $ 45,000.00 |
| Total cash disbursements | $ 377,280.00 | $ 417,665.00 | $ 416,985.00 | $ 1,211,930.00 |
| Excess (deficiency) of cash | $ (48,280.00) | $ 43,455.00 | $ 157,270.00 | $ 78,270.00 |
| Financing: | ||||
| Borrowings | $ 79,000.00 | $ - | $ - | $ 79,000.00 |
| Repayments | $ - | $ - | $ (79,000.00) | $ (79,000.00) |
| Interest | $ - | $ - | $ (2,370.00) | $ (2,370.00) |
| Total financing | $ 79,000.00 | $ (81,370.00) | $ (2,370.00) | |
| Ending cash balance | $ 30,720.00 | $ 43,455.00 | $ 75,900.00 | $ 75,900.00 |
| Income Statement | ||
| For the Quarter Ended March 31 | ||
| Sales | $ 1,281,000.00 | |
| Cost of goods sold: | ||
| Beginning inventory | $ 58,650.00 | |
| Purchases | $ 739,800.00 | |
| Goods available for sale | $ 798,450.00 | |
| Ending inventory | $ 29,850.00 | $ 768,600.00 |
| Gross margin | $ 512,400.00 | |
| Selling and administrative expenses: | ||
| Salaries and wages | $ 63,000.00 | |
| Advertising | $ 183,000.00 | |
| Shipping | $ 64,050.00 | |
| Depreciation | $ 43,060.00 | |
| Other expenses | $ 38,430.00 | $ 391,540.00 |
| Net operating income | $ 120,860.00 | |
| Interest expense | $ 2,370.00 | |
| $ 118,490.00 | ||
| Balance Sheet | ||
| 31-Mar | ||
| Assets | ||
| Cash | $ 75,900.00 | |
| Accounts receivable | $ 241,600.00 | |
| Inventory | $ 29,850.00 | |
| Total current assets | $ 347,350.00 | |
| Building & Equipment | $ 356,000.00 | |
| Add: Purchases | $ 74,600.00 | |
| Less: Depreciation | $ (43,060.00) | $ 387,540.00 |
| Total assets | $ 734,890.00 | |
| Liabilities and Stockholders’ Equity | ||
| Current liabilities: | ||
| Stockholders' equity: | ||
| Accounts payable | $ 82,875.00 | |
| Common stock | $ 500,000.00 | |
| Retained earnings (78,525+118490-45000) | $ 152,015.00 | |
| Total liabilities and stockholders’ equity | $ 734,890.00 | |
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