Case (30 pts) : Completing a Master Budget. Hillyard Company, an office supplies
ID: 2474845 • Letter: C
Question
Case (30 pts): Completing a Master Budget.
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:
Accounts
Debits
Credits
Cash
$48,000
Accounts Receivable
224,000
Inventory
60,000
Buildings and equipment (net)
370,000
Accounts payable
$93,000
Common stock
500,000
Retained earnings
109,000
702,000
702,000
Actual sales for December and budgeted sales for the next four months are as follows:
Period
Amounts
December (actual)
$280,000
January
$400,000
February
$600,000
March
$300,000
April
$200,000
Sales are 20% for cash and 80% on credit. All payment 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 = $27,000 per month;
Advertising = $70,000 per month;
Shipping = 5% of sales;
Other expenses = 3% of sales;
Depreciation including depreciation of new assets acquired during the quarter will be $42,000 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 $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500.
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 the 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:
Schedule of expected cash collections (6 pts):
January
February
March
Quarter
Cash sales
$80,000
Credit sales
224,000
Total cash collections
$304,000
Merchandise purchases budget (6 pts):
January
February
March
Quarter
Budgeted cost of goods sold
$240,000*
$360,000
Add: Desired ending inventory
90,000**
Total needs
330,000
Less: Beginning inventory
(60,000)
Required purchases
270,000
*$400,000 sales × 60% cost ratio = $240,000
*$360,000 × 25% = $90,000
Schedule of expected cash disbursements for merchandise purchases (5 pts):
January
February
March
Quarter
December purchases
$93,000
$93,000
January purchases
135,000
135,000
270,000
February purchases
-
March purchases
-
Total cash disbursements for purchases
$228,000
Cash budget (13 pts):
January
February
March
Quarter
Beginning cash balance
Add: cash collections
Total cash available
Less: cash disbursements
Purchases of inventory
Selling and administrative expenses
Purchases of equipment
Cash dividends
Total cash disbursements
Excess (deficiency) of cash
Financing
Borrowings
Repayments
Interest
Total Financing
Ending cash balance
Accounts
Debits
Credits
Cash
$48,000
Accounts Receivable
224,000
Inventory
60,000
Buildings and equipment (net)
370,000
Accounts payable
$93,000
Common stock
500,000
Retained earnings
109,000
702,000
702,000
Explanation / Answer
Schedule of expected cash collections January February March Quarter Sales 400000 600000 300000 1300000 Cash Collection Cash sale - 20 % current month sale 80000 120000 60000 260000 Credit Sale - 80 % of Previous month sale 224000 320000 480000 1024000 ( For January we are given opening accounts receivables) Total cash collection per month 304000 440000 540000 1284000 Merchandise Purchase Budget January February March April Cost of Goods Sold 240000 360000 180000 120000 Add: Ending inventory -25 % of Next month C.O.G.S. 90000 45000 30000 Total Needs 330000 405000 210000 Less: Opening inventory 60000 90000 45000 (Given for month ofJanuary) Required Purchases 270000 315000 165000 Schedule of expected cash disbursements for merchandise purchases January February March Quarter Required Purchases 270000 315000 165000 750000 Cash Disbursements December Purchase 93000 93000 January Purchase 135000 135000 270000 February Purchase 157500 157500 315000 March Purchase 82500 82500 Total Cash disbursements for purchases 228000 292500 240000 760500 Cash is paid 50 % in current month and remaining 50 % is paid in following month of purchase
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