The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:
| Current assets as of March 31: | ||
| Cash | $ |
8,100 |
| Accounts receivable | $ |
22,400 |
| Inventory | $ |
43,200 |
| Building and equipment, net | $ |
129,600 |
| Accounts payable | $ |
25,800 |
| Common stock | $ |
150,000 |
| Retained earnings | $ |
27,500 |
The gross margin is 25% of sales.
Actual and budgeted sales data:
| March (actual) | $ | 56,000 |
| April | $ | 72,000 |
| May | $ | 77,000 |
| June | $ | 102,000 |
| July | $ | 53,000 |
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, $2,900 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $972 per month (includes depreciation on new assets).
Equipment costing $2,100 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 preceding data:
1. Complete the schedule of expected cash collections.
2. Complete the merchandise purchases budget and the schedule of expected cash disbursements for merchandise purchases.
3. Complete the cash budget.
4. Prepare an absorption costing income statement for the quarter ended June 30.
5. Prepare a balance sheet as of June 30.
Solution 1:
| Schedule of expected cash collections | ||||
| Particulars | April | May | June | Quarter |
| Budgeted Sales | $72,000.00 | $77,000.00 | $102,000.00 | $251,000.00 |
| Cash Sale | $43,200.00 | $46,200.00 | $61,200.00 | $150,600.00 |
| Collection for credit sales | $22,400.00 | $28,800.00 | $30,800.00 | $82,000.00 |
| Total Collections | $65,600.00 | $75,000.00 | $92,000.00 | $232,600.00 |
Solution 2:
| Merchandise Purchase Budget | ||||
| Particulars | April | May | June | Quarter |
| Budgeted Cost of Goods Sold (75% of Sales) | $54,000.00 | $57,750.00 | $76,500.00 | $188,250.00 |
| Add: Desired ending merchandise inventory (80% of next month COGS) | $46,200.00 | $61,200.00 | $31,800.00 | $31,800.00 |
| Total Needs | $100,200.00 | $118,950.00 | $108,300.00 | $220,050.00 |
| Less: Beginning inventory | $43,200.00 | $46,200.00 | $61,200.00 | $43,200.00 |
| Required purchases | $57,000.00 | $72,750.00 | $47,100.00 | $176,850.00 |
| Schedule of expected cash disbursement - Merchandise Purchases | ||||
| Particulars | April | May | June | Quarter |
| March Purchases | $25,800.00 | $25,800.00 | ||
| April Purchases | $28,500.00 | $28,500.00 | $57,000.00 | |
| May Purchases | $36,375.00 | $36,375.00 | $72,750.00 | |
| June Purchases | $23,550.00 | $23,550.00 | ||
| Total Disbursement | $54,300.00 | $64,875.00 | $59,925.00 | $179,100.00 |
Solution 3:
| Cash Budget - Shilow company | ||||
| Particulars | April | May | June | Quarter |
| Opening Cash balance | $8,100.00 | $4,440.00 | $4,805.00 | $8,100.00 |
| Add: Collection from customers | $65,600.00 | $75,000.00 | $92,000.00 | $232,600.00 |
| Total Cash Available | $73,700.00 | $79,440.00 | $96,805.00 | $240,700.00 |
| Less - Cash Disbursement: | ||||
| For Inventory | $54,300.00 | $64,875.00 | $59,925.00 | $179,100.00 |
| For Expenses | $15,860.00 | $16,760.00 | $21,260.00 | $53,880.00 |
| For Equipment | $2,100.00 | $0.00 | $0.00 | $2,100.00 |
| Total Cash disbursement | $72,260.00 | $81,635.00 | $81,185.00 | $235,080.00 |
| Excess (deficiency) of cash available over disbursements | $1,440.00 | -$2,195.00 | $15,620.00 | $5,620.00 |
| Financing: | ||||
| Borrowings | $3,000.00 | $7,000.00 | $0.00 | $10,000.00 |
| Repayments | $0.00 | $0.00 | -$10,000.00 | -$10,000.00 |
| Interest | $0.00 | $0.00 | -$230.00 | -$230.00 |
| Total Financing | $3,000.00 | $7,000.00 | -$10,230.00 | -$230.00 |
| Ending cash balance | $4,440.00 | $4,805.00 | $5,390.00 | $5,390.00 |
Solution 4:
| Absorption costing income statement - Shilow Company | |
| for quarter ended June 30 | |
| Particulars | Amount |
| Sales | $251,000.00 |
| Cost of goods sold (75%) | $188,250.00 |
| Gross profit | $62,750.00 |
| Operating expenses: | |
| Sales commission | $30,120.00 |
| Rent | $8,700.00 |
| Other expenses | $15,060.00 |
| Depreciation | $2,916.00 |
| Total operating expenses | $56,796.00 |
| Operating income | $5,954.00 |
| Interest expense | $230.00 |
| Net Income | $5,724.00 |
Solution 5:
| Balance Sheet- Shilow Company | |
| 30-Jun | |
| Particulars | Amount |
| Assets: | |
| Cash | $5,390.00 |
| Accounts receivables ($102,000*40%) | $40,800.00 |
| Inventory | $31,800.00 |
| Building and equipment, net ($129,600 +$2,100 - $2,916) | $128,784.00 |
| Total Assets | $206,774.00 |
| Liabilities and stockholder's Equity: | |
| Accounts payable (47,100*50%) | $23,550.00 |
| Common Stock | $150,000.00 |
| Retained Earnings ($27,500 + $5,724) | $33,224.00 |
| Total liabilities and stockholders equity | $206,774.00 |
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