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 $ 8,600 $ 24,400 $ 46,200 $ 118,800 $ 27,675 $ 150,000 $ 20,325 a. The gross margin is 25% of sales. b. Actual and budgeted sales data: March (actual) April May June July $ 61,000 $ 77,000 $ 82,000 $ 107,000 $ 58,000 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, $3,400 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $891 per month (includes depreciation on new assets). g. Equipment costing $2,600 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.

Answer 1

1	Schedule of expected Cash Collections
		April	May	June	Quarter
	Cash Sales	46200	49200	64200	159600
	Credit Sales	24400	30800	32800	88000
	Total collections	70600	80000	97000	247600
2	Merchandise Purchases Budget
		April	May	June	Quarter
	Budgeted cost of goods sold	57750	61500	80250	199500
	Add desired ending merchandise inventory	49200	64200	34800	34800
	Total needs	106950	125700	115050	234300
	Less beginning merchandise inventory	46200	49200	64200	46200
	Required purchases	60750	76500	50850	188100
	Schedule of Expected Cash Disbursements - Merchandise Purchases
		April	May	June	Quarter
	March Purchases	27675			27675
	April Purchases	30375	30375		60750
	May Purchases		38250	38250	76500
	June Purchases			25425	25425
	Total disbursements	58050	68625	63675	190350

3	Shilow Company
	Cash Budget
		April	May	June	Quarter
	Beginning cash balance $	8600	4290	4505	8600
	Add collections from customers	70600	80000	97000	247600
	Total cash available	79200	84290	101505	256200
	Less cash disbursements:
	For inventory	58050	68625	63675	190350
	For expenses	17260	18160	22660	58080
	For equipment	2600	0	0	2600
	Total cash disbursements	77910	86785	86335	251030
	Excess (deficiency) of cash available over disbursements	1290	-2495	15170	5170
	Financing:
	Borrowings	3000	7000	0	10000
	Repayments	0	0	-10000	-10000
	Interest	0	0	-230	-230
	Total financing	3000	7000	-10230	-230
	Ending cash balance $	4290	4505	4940	4940

Interest = ($3000 x 1% x 3) + ($7000 x 1% x 2) = $90 + $140 = $230

4	Shilow Company
	Income Statement
	For the Quarter Ended June 30
	Sales		266000
	Cost of goods sold:
	Beginning inventory	46200
	Purchases	188100
	Goods available for sale	234300
	Ending inventory	34800	199500
	Gross profit		66500
	Selling and administrative expenses:
	Commissions (12% x $266000)	31920
	Rent ($3400 x 3)	10200
	Depreciation ($891 x 3)	2673
	Other expenses (6% x $266000)	15960
			60753
	Net operating income		5747
	Interest expense		230
	Net income		5517

5	Shilow Company
	Balance Sheet
	June 30
	Assets
	Current assets:
	Cash		4940
	Accounts receivable ($107000 x 40%)		42800
	Inventory		34800
	Total current assets		82540
	Building and equipment, net ($118800 + 2600 - 2673)		118727
	Total assets		201267
	Liabilities and Stockholders' Equity
	Accounts payable ($50850/2)		25425
	Stockholders' equity:
	Common stock	150000
	Retained earnings ($20325 + $5517)	25842
			175842
	Total liabilities and stockholders' equity		201267