Question

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods: Current assets as of March 31: Cash Accounts receivable Inventory Building and equipment, net Accounts payable Common stock Retained earnings $ 7,200 $ 18,800 $ 37,800 $ 123,600 $ 22,425 $ 150,000 $ 14,975 a. The gross margin is 25% of sales. b. Actual and budgeted sales data: March (actual) April May June July $ $ $ $ $ 47,000 63,000 68,000 93,000 44,000 c. 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. d. Each month's ending inventory should equal 80% of the following month's budgeted cost of goods sold. e. 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. f. Monthly expenses are as follows: commissions, 12% of sales, rent, $2,000 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $927 per month (includes depreciation on new assets). g. Equipment costing $1,200 will be purchased for cash in April. h. 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.

Answer 1

1)Schedule of Cash Receipt Schedule of Expected Cash Collections April Quarter May June Cash Sale Credit Sale Total 37,800 55,800 134,400 40,800 71,200 18,800 25,200 27,200 56,600 66,000 83,000 205,600 Credit sale is the credit sale of the preceding month Working Notes April May Quarter June Sales Actual (a) Cash Sales (ax 60%) Credit Sales (ax 40%) 93,000 63,000 68,000 224,000 37,800 40,800 27,200 55,800 25,200 37,200 X 2) Merchandise Purchase Budget April May June Quarter Budgeted Cost of goods sold Add Desired ending Inventory Total need Less: Beginning Inventory Required Purhcases 47,250 51,000 69,750 168,000 40,800 55,800 26,400 26,400 88,050 106,800 96,150 194,400 37,800 55,800 37,800 40,800 50,250 66,000 40,350 156,600 Working Notes April May July June Sales (A) 68,000 44,000 63,000 93,000 17,000 Less: Gross Profit (Ax 25%) 15,750 23,250 11,000 Cost of goods sold 47,250 51,000 69,750 33,000 Desired Ending Inventory 40,800 55,800 26,400 (51,000 x 80%) (69,750 x 80%)(33,000 x 80%) X

Schedule of Expected Cash Disbursement - Merchandise Purchases April Quarter May June March Purchases 22,425 22,425 April May 25,125 25,125 33,000 50,250 33,000 66,000 June 20,175 20,175 Total 53,175 158,850 47,550 58,125 Working Notes April May June Required Purchases (a) 50,250 66,000 40,350 Paid in the same Month (a/2) 25,125 33,000 20,175 Paid in the following month (a/2) 25,125 33,000 20,175

Required 3) Shilow Company Cash Budget May 7,200 56,600 Quarter April June Beginning Cash Balance Add: Collections from customer 4,710 4,345 7,200 83,000 205,600 66,000 Total Cash available (a) 63,800 70,710 87,345 212,800 Less Cash disbursements For Inventory 47,550 58,125 53,175 158,850 Commission 7,560 8,160 11,160 26,880 2,000 6,000 Rent 2,000 2,000 Other expense 4,080 5,580 13,440 3,780 For Equipment 1,200 1,200 Total Cash disbursement (b) 206,370 62,090 72,365 71,915 Excess (deficiency) of cash available over disbursements [c= (a-b)] Minimum Cash balance requirment (1,655) 1,710 15,430 6,430 4,000 4,000 4,000 4,000 Cash Excess (needed) (5,655) (2,290) 11,430 2,430 Financing: Borrowings 3,000 6,000 9,000 (9,000) (9,000) Repayments (210) (210) Interest Total Financing (d) Ending Cash Balance (c+d) 3,000 (9,210) (210) 6,000 4,710 4,345 6,220 6,220

Working Notes: Calculation of Expenses April May June Quarter 224,000 Sale (a) 68,000 93,000 63,000 Expenses: Commissions (a x 12%) 7,560 26,880 8,160 11,160 Other expenses (ax 6%) 4,080 5,580 13,440 3,780 Calculation of Interest Interest rate Interest on Borrowing of 3,000 for three months (April to June) (3,000 x 1% x 3) 1% per month 90 Interest on Borrowing of 6,000 for two Months (May and June) (6,000 x 1% x 2) 120 Total Interest (90+120) 210

Required 4) Shilow Company Income Statement For the Quarter Ended June 30 Sales Cost of goods sold Beginning Inventory Add: Purchases 224,000 37,800 156,600 194,400 Less: Ending Inventory Gross Margin Selling and administrative expenses: Commission Rent 26,400 168,000 56,000 26,880 6,000 Depreciation (927 x 3) Other expenses Net Operating Income (56,000- 49,101) Interest expenses Net Income (6,899 - 210) 2,781 13,440 49,101 6,899 210 6,689

Required 5) Shilow Company Balance Sheet June 30 Assets Current Assets: Cash Accounts receivable Inventory 6,220 37,200 26,400 Total Current assets Building and Equipment - net Total Assets 69,820 122,019 191,839 Liabilities and Stockholders' Equity Accounts Payable Stockholders' Equity: Common Stock Retained Earnings 20,175 150,000 171,664 21,664 Total Liabilities and Stockholders' Equity 191,839

Working Notes: Value of Equipment as on June 30: Balance as on March 31 Add: Equipment purchases Less: Depreciation 123,600 1,200 (2,781) Balance as on June 30 122,019 Retained Earnings as on June 30 Balance as on March 31 14,975 Add: Net Income Balance as on June 30 6,689 21,664 |Accounts receivable was 40% of June sale i.e. (93,000 x 40%) it will be received in July | ** Accounts Payable was 50% of June purchases i.e.(40,350/2) it will be paid in July