Question

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

Current assets as of March 31:
Cash	$	7,600
Accounts receivable	$	20,400
Inventory	$	40,200
Building and equipment, net	$	128,400
Accounts payable	$	23,925
Capital stock	$	150,000
Retained earnings	$	22,675

The gross margin is 25% of sales.

Actual and budgeted sales data:

  

March (actual)	$	51,000
April	$	67,000
May	$	72,000
June	$	97,000
July	$	48,000

  

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, $2,400 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $963 per month (includes depreciation on new assets).

Equipment costing $1,600 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 data above:

1. Complete the following schedule.

Schedule of Expected Cash Collections
	April	May	June	Quarter
Cash sales	$40,200	$43,200	$58,200	$141,600
Credit sales	20,400	26,800	28,800	76,000
Total collections	$60,600	$70,000	$87,000	$217,600

2. Complete the following:

Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted cost of goods sold	$50,250	$54,000	$72,750	$177,000
Add desired ending inventory	43,200	58,200	28,800	130,200
Total needs	93,450	112,200	101,550	307,200
Less beginning inventory	40,200	(43,200)	(58,200)	(141,600)
Required purchases	$53,250	$69,000	$43,350	$165,600

Schedule of Expected Cash Disbursements—Merchandise Purchases
	April	May	June	Quarter
March purchases	$23,925	$0	$0	$23,925
April purchases	26,625	26,625	0	53,250
May purchases	0	34,500	34,500	69,000
June purchases	0	0	21,675	21,675
Total disbursements	$50,550	$61,125	$56,175	$167,850

3. Complete the following cash budget: (Borrow and repay in increments of $1,000. Cash deficiency, repayments and interest should be indicated by a minus sign.)

Shilow Company
Cash Budget
	April	May	June	Quarter
Beginning cash balance	$7,600
Add cash collections	60,600
Total cash available	68,200	0	0	0
Less cash disbursements:
For inventory	50,550
For expenses	14,460
For equipment	1,600
Total cash disbursements	66,610	0	0	0
Excess (deficiency) of cash	1,590	0	0	0
Financing:
Borrowings
Repayments
Interest
Total financing	0	0	0	0
Ending cash balance	$1,590	$0	$0	$0

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

Shilow Company
Income Statement
For the Quarter Ended June 30
Cost of goods sold:
	0
		0
		0
Selling and administrative expenses:
		0
		0
		0

Answer 1