Hillyard Company, an office supplies specialty store, prepares its master budget

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:

As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

56,000

212,800

60,150

366,000

89,925

500,000

105,025

694,950

694,950

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

266,000

401,000

598,000

313,000

209,000

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.

The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

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.

Each month’s ending inventory should equal 25% of the following month’s 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 in the following month.

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.

During January, the company will declare and pay $45,000 in cash dividends.

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.

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

Explanation / Answer

1)                       Schedule of Expected cash collections                      January Feburary March Quarter Cash sales 80200 119600 62600 262400 Credit sales 212,800 320800 478400 1,012,000 total collections 293000 440400 541000 1274400 Accounts receivable at march 31=313,000*80%= 250400 2-a) Merchandise purchase budget January Feburary March Quarter April budgeted cost of goods sold 240600 358800 187800 787200 125400 Add:Ending inventory 89700 46950 31350 31,350 total needs 330300 405750 219150 818550 less Beginning inventory 60,150 89,700 46,950 60,150 Required purchases 270,150 316,050 172,200 758,400 2-b) Schedule of Expected cash disbursement for Merchandise purchase January Feburary March Quarter December purchases 89,925 89,925 january purchases 135075 135075 270150 Feburary purchases 158025 158025 316050 march purchases 86100 86100 total cash disbursement for purchases 225,000 293100 244125 762,225 Accounts payable= 86,100 3) Cash budget January Feburary March Quarter Beginning cash balance 56,000 30,920 31780 56,000 Add cash collections 293000 440400 541000 1274400 total cash available 349,000 471320 572780 1,330,400 less cash disbursements purchase of inventory 225,000 293100 244125 762,225 selling and adm expense 128080 143840 121040 392960 purchase of equipment 0 2,600 78,000 80600 cash dividends 45,000 0 0 45,000 total cash disbursement 398,080 439540 443165 1,280,785 Excess(Deficiency) of cash -49,080 31780 129615 49,615 Financing Borrowings 80,000 0 0 80,000 Repayments 0 0 -80,000 -80,000 interest 0 0 -2,400 -2400 total financing 80,000 0 -82400 -2,400 ending cash balance 30,920 31780 47215 47,215 interest expense = 80000*1%*3 2400 4) income statememt Sales 1312000 cost of goods sold Beginning invnetory 60,150 Add purchases 758,400 cost of goods avaialble 818,550 less ending inventory 31,350 787,200 Gross profit 524,800 Selling and administrative exp Salaries and wages 93,000 Advertising 195,000 shiiping 5% of sales 65600 other expense 3% of sales 39360 Depreciation 44,660 437,620 operating income 87,180 less interest expense 2,400 Net income 84,780 5) Balance sheet Asses current assets cash 47215 Account receivable 250,400 inventory 31,350 total current assets 328,965 buildings and Equipment (net) (366000+2600+78000-44660) 401940 total assets 730,905 liabilities & stockholders Equity current liabilities Accounts payable 86,100 total current liabilities 86,100 Stockholders Equity common stock 500,000 Retained earnings (105,025+84,780-45000) 144,805 total stockholders equity 644,805 total liabilities & stockholders equity 730,905

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