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:

Cash	$	56,000
Accounts receivable		212,800
Inventory		60,150
Buildings and equipment (net)		366,000
Accounts payable			$	89,925
Common stock				500,000
Retained earnings				105,025
	$	694,950	$	694,950

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

December(actual)	$	266,000
January	$	401,000
February	$	598,000
March	$	313,000
April	$	209,000

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, $31,000 per month: advertising, $65,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,660 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 $2,600 cash. During March, other equipment will be purchased for cash at a cost of $78,000.

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

Sales Budget January 401000 February March Quarter 598000 313000 1312000 3 Sales Schedule of Expected Cash Collections January February March Quarter 8 Cash Sales 80,200 1,19,600 62,600 2,62,400 9 Credit Sales 2,12,800 3,20,800 4,78,400 10,12,000 10 Total Cash Collections 2,93,000 4,40,400 5,41,000 12,74,400 11 12 Merchandise Purchases Budget 13 January February March Quarter 14 Budget Cost of Goods Sold 2,40,600 3,58,800 1,87,800 7,87,200 15 Add Desired Ending Inventory 89700 46950 31,350 29,100 16 Total Needs 3,30,300 4,05,750 2,19,150 8,16,300 17 Less Beginning Inventory 60,150 89700 46950 60,150 18 Required Purchases 2,70,150 3,16,050 1,72,200 7,58,400 19 209000 * 60 % 25 % = 31350 20 Schedule of Expected Cash Disbursements 21 January February March Quarter 22 December Purchases 89,925 89,925 23 January Purchases 135075 135075 270150 24 February Purchase 158025 158025 316050 25 March Purchases 86100 26 Total Cash Disbursement for Purchases 2,25,000 2,93,100 2,44,125 7,62,225 27 28 Schedule of Cash expenses 29 January February March Quarter 30 Salaries and Wages 31.000 31.000 31.000 93.000 31 Advertising 65000 65000 65000 1,95,000 32 Shipping 20,050 29,900 15,650 65,600 33 Other Expenses 12.030 17.940 9,390 39,360 34 Total Cash Disbursment for Selling and Administrative Expenses 1,28,080 1,43,840 1,21,040 3,92,960 35 86100

C D E B Cash Budget January 56,000 2,93,000 3,49,000 February March 30,920 31,780 4,40,400 5,41,000 4,71,320 5,72,780 Quarter 56,000 12,74,400 13,30,400 2,25,000 1.28.080 2,93,100 1.43.840 2600 2,44,125 7,62,225 1210403 .92.960 78,000 80,600 45,000 4,43,165 12,80,785 1,29,615 49,615 45000 3,98,080 -49,080 4,39,540 31,780 80000 80000 -80000 -2400 80000 2400 82,400 47,215 80000 30,920 31,780 47,215 - 36 - 37 38 Cash Balance Beginning 39 Add Cash Collections 40 Total Cash Available 41 Less Cash Disburtments: 42 Inventory Purchases 43 Selling and Administrative Expenses 44 Equipment Purchases 45 Cash Dividend 46 Total Cash Disbursement 47 Excess (deficiency) of cash 48 Financing: 49 Borrowings 50 Repayments 51 Interest ( 80000* 1% * 3) 52 Total Financing 53 Cash Balance, Ending 54 55 Hillyard Company 56 Income Statement 57 Sales 58 Cost Of Goods Sold: 59 Beginning Inventory 60 Add Purchase 61 Goods Available for Sale 62 Ending Inventory 63 Gross Margin 64 Selling and Administrative Expenses: 65 Salaries and Wages 66 Advertising 67 Shipping Depreciation 69 Other Expenses 70 Net Operating Income 71 Interest Expenses 72 Net Income 73 13,12,000 60,150 7,58,400 8,18,550 31,350 7,87,200 5,24,800 93,000 1,95,000 65,600 44,660 39,360 4,37,620 87,180 2.400 84,780

A Mar-31 47,215 2,50,400 31,350 3,28,965 74 Hillyard Company 75 Balance Sheet 76 77 78 Assets 79 Current Assets: 80 Cash 81 Accounts Receivable (80% * 313,000) 82 Inventory 83 Total Current Assets 84 Buildings and Equipment, Net 85 366000 + 2600 + 78000 - 44660 86 Total Assets 87 Liabilities and Equity 89 Current Liabilities 90 Accounts Payable 91 StockHolder's Equity 92 Capital Stock 93 Retained Earnings (105025 + 84780 - 45000) 94 Total Liabilities and Equity 4,01,940 7,30,905 88 86100 500000 1,44,805 6,44,805 7,30,905

January 401000 Sales Budget February 598000 March 313000 3 Quarter =B3+C3+D3 Sales 8 9 10 11 Cash Sales Credit Sales Total Cash Collections Schedule of Expected Cash Collections January February =B3*0.2 =C3*0.2 212800 =B3*0.8 =B8+B9 =C8+C9 March =D3*0.2 =C3*0.8 =D8+D9 Ouarter =B8+C8+D8 =B9+C9+D9 =E8+E9 12 Merchandise Purchases Budget January February =B3.0.6 =C3*0.6 =C14+0.25 =D14+0.25 =B14+B15 =C14+C15 60150 =BIS =B16-B17 =C16-C17 March =D3*0.6 31350 =D14+D15 =C15 =D16-D17 Quarter =B14+C14+D14 29100 =E14+E15 =B17 =B18+C18+D18 13 14 Budget Cost of Goods Sold 15 Add Desired Ending Inventory 16 Total Needs 17 Less Beginning Inventory 18 Required Purchases 19 209000 • 60% 25 % = 31350 20 21 22 December Purchases ases 23 January Purchases 24 February Purchase 25 March Purchases 26 Total Cash Disbursement for Purchases March Schedule of Expected Cash Disbursements January February 89925 =B18*0.5 =B18*0.5 =C18*0.5 Quarter -B22 =B23+C23+D23 =B24+C24+D24 =B25+C25+D25 =E22+E23+E24+E25 =C18*0.5 =D18*0.5 =D22+D23+D24+D25 =B22+B23+B24+B25 =C22+C23+C24+C25 27 28 29 30 Salaries and Wages 31 Advertising 32 Shipping 33 Other Expenses 34 Total Cash Disbursment for Selling and Administrative Expenses Schedule of Cash expenses January February 31000 31000 65000 65000 =B3*0.05 =C3*0.05 =B3+0.03 =C3+0.03 =B30+B31+B32+B33 =C30+C31+C32+C33 March 31000 65000 =D3*0.05 =D3*0.03 =D30+D31+D32+D33 Quarter =B30+C30+D30 =B31+C31+D31 =B32-C32+D32 =B33+C33+D33 =E30+E31+E32+E33 35

Cash Budget February =B53 =C10 =C38+C39 January 56000 =B10 =B38+B39 Quarter =B38 March =C53 =D10 =D38+D39 E10 =E38+E39 =B26 -B34 =C26 =C34 2600 =D26 -D34 78000 =E26 -E34 =B44+C44+D44 =B45 =E42+E43+E44+E45 =E40-E46 45000 =B42+B43+B44+B45 =B40-B46 =C42+C43+C44+C45 =C40-C46 =D42+D43+D44+D45 =D40-D46 80000 =B49+C49+D49 =-D50 =-D51 80000 2400 =D50+D51 =D47-D52 =B49 =B49+B47 =D53 36 37 38 Cash Balance Beginning 39 Add Cash Collections 40 Total Cash Available 41 Less Cash Disburtments: 42 Inventory Purchases 43 Selling and Administrative Expenses 44 Equipment Purchases 45 Cash Dividend 46 Total Cash Disbursement 47 Excess (deficiency) of cash 48 Financing: 49 Borrowings 50 Repayments 51 Interest (80000* 1% 3) 52 Total Financing 53 Cash Balance, Ending 54 55 Hillyard Company 56 Income Statement 57 Sales 58 Cost Of Goods Sold: 59 Beginning Inventory 60 Add Purchase Goods Available for Sale Ending Inventory 63 Gross Margin 64 Selling and Administrative Expenses: Salaries and Wages Advertising 67 Shipping Depreciation 69 Other Expenses 70 Net Operating Income 71 Interest Expenses 72 Net Income 73 =E3 61 62 -B17 =E18 =B59+B60 =D15 =B61-B62 C57-C62 65 66 =E30 =E31 =E32 44660 =E33 68 =B65+B66+B68+B67+B69 =C63-C69 D51 -C70-C71

=D53 250400 =B62 =C81+C80+C82 74 Hillyard Company 75 Balance Sheet 76 11383 77 78 Assets 79 Current Assets: 80 Cash 81 Accounts Receivable (80% x 313,000) 82 Inventory 83 Total Current Assets 84 Buildings and Equipment, Net 85 366000 + 2600 + 78000 - 44660 86 Total Assets 87 88 Liabilities and Equity 89 Current Liabilities 90 Accounts Payable 91 StockHolder's Equity 92 Capital Stock Retained Earnings (105025 +84780 - 45000) 94 Total Liabilities and Equity 95 401940 -C83+C85 86100 500000 144805 93 =B92+B93 C90+C93 96