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:
Cash $ 40,000
Accounts receivable 200,000
Inventory 57,750
Buildings and equipment (net)350,000
Accounts payable $ 85,125
Common stock 500,000
Retained earnings 62,625
$ 647,750 $ 647,750
Actual sales for December and budgeted sales for the next four months are as follows:
December(actual) $ 250,000
January $ 385,000
February $ 582,000
March $ 296,000
April $ 193,000
c. 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.
d. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)
e. Monthly expenses are budgeted as follows: salaries and wages, $15,000 per month: advertising, $55,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,100 for the quarter.
f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.
g. 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.
h. During February, the company will purchase a new copy machine for $1,000 cash.
i. During March, other equipment will be purchased for cash at a cost of $70,000. During January, the company will declare and pay $45,000 in cash dividends.
j. 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:
.Prepare an absorption costing income statement for the quarter ending March 31.
Prepare a balance sheet as of March 31.

Explanation / Answer

SALES BUDGET: December January February March Quarter April Total sales 250000 385000 582000 296000 1263000 193000 Cash sales (20%) 50000 77000 116400 59200 252600 38600 Credit sales (80%) 200000 308000 465600 236800 1010400 154400 SCHEDULE OF EXPECTED CASH COLLECTIONS: April May June Quarter Cash sales 77000 116400 59200 252600 Credit sales 200000 308000 465600 973600 Total collections 277000 424400 524800 1226200 MERCHANDISE PURCHASES BUDGET: Budgeted cost of goods sold (60% of sales) 231000 349200 177600 757800 115800 Add: Desired ending inventory 87300 44400 28950 28950 Total needs 318300 393600 206550 786750 Less: Beginning inventory 57750 87300 44400 57750 Required purchases 260550 306300 162150 729000 SCHEDULE OF EXPECTED CASH DISBURSEMENTS-MERCHANDISE PURCHASES: March purchases 85125 85125 April purchases 130275 130275 260550 May purchases 153150 153150 306300 June purchases 81075 81075 Total disbursements 215400 283425 234225 733050 CASH BUDGET: Beginning cash balance 40000 30800 54215 40000 Add: Cash collections 277000 424400 524800 1226200 Total cash available 317000 455200 579015 1266200 Less: Cash disbursements For inventory 215400 283425 234225 733050 For expenses (15000+55000+8% of sales) 100800 116560 93680 311040 Cash dividends 45000 45000 For Equipment 1000 70000 71000 Total cash disbursements 361200 400985 397905 1160090 Excess/(Deficiency of cash) -44200 54215 181110 106110 Financing: Borrowings 75000 0 0 75000 Repayments 0 0 75000 75000 Interest 0 0 2250 2250 Total financing 75000 0 -77250 -2250 Ending cash balance 30800 54215 103860 103860 INCOME STATEMENT: Sales 1263000 COGS 757800 Gross profit 505200 Selling and administrative expenses: Salaries and wages 45000 Advertising 165000 Shipping 63150 Other expenses 37890 Depreciation 42100 353140 Operating income 152060 Interest 2250 Net Income 149810 BALANCE SHEET: ASSETS: Current assets: Cash 103860 Accounts receivable 236800 Inventory 28950 369610 Building & Equipment (net) 378900 Total assets 748510 TOTAL LIABILITIES & EQUITY: Current liabilities: Accounts payable 81075 81075 Stockholders' equity; Common stock 500000 Retained earnings 167435 667435 Total liabilities & Equity 748510 0

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