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

ID: 2519573 • Letter: H

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:

60,000

216,000

60,750

370,000

91,125

500,000

115,625

706,750

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

270,000

405,000

602,000

317,000

213,000

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, $35,000 per month: advertising, $61,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,300 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 $3,000 cash. During March, other equipment will be purchased for cash at a cost of $80,000.

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 $

60,000

Accounts receivable

216,000

Inventory

60,750

Buildings and equipment (net)

370,000

Accounts payable $

91,125

Common stock

500,000

Retained earnings

115,625

706,750

Explanation / Answer

Following assumptions are taken for calculating schedule of cash collections

Basis on this the schedule of expected cash collections is given below

Schedule of Expected Cash Collections

December

January

February

March

Quarter

budgeted sales

270000

405000

602000

317000

Cash sales(20% of current month

54000

81000

120400

63400

264800

Credit sales(80% of previous month)

$216,000

$324,000

$481,600

1021600

Total Collections

297000

444400

545000

1286400

2 )

Following assumptions are taken for calculating schedule of Merchandise purchases budget

Cost of goods sold for Jan = budgeted sales of jan x 60%

Cost of goods sold for Jan = $405000x 60%

Cost of goods sold for Jan = $243000

Closing inventory of jan = cost of goods sold of feb x 25%

Closing inventory of jan = $361200x 25%

Closing inventory of jan = $90,300

The formula to calculate merchandise purchase is

Purchase for the month= cost of goods sold for the month + closing inventory for the month – opening inventory for the month or closing inventory of previous month

The schedule of merchandise purchase budget is calculated below

Merchandise Purchases Budget

January

February

March

april

Quarter

budgeted sales

405000

602000

317000

213000

Budgeted Cost of Goods Sold(60% of current month sale)

243000

361200

190200

127800

794400

Add desired ending inventory

90300

47550

31950

169800

Total needs

$333,300

$408,750

$222,150

964200

Less beginning inventory

$60,750

90300

47550

198600

Required purchases

$272,550

$318,450

$174,600

765600

Following assumptions are taken for calculating Schedule of expected cash disbursements for merchandise purchases:

50% cash will paid for purchases in jan

Balance 50% cash will be paid in feb forpurchases of jan

The Schedule of expected cash disbursements for merchandise purchases is given below

Schedule of Expected Cash Disbursements-Merchandise Purchases

January

February

March

Quarter

December purchases( accounts payable closing balance of december balance sheet)

$91,125

January purchases

$136,275

$272,550

February purchases

$159,225

$318,450

March purchases

$87,300

Total disbursements

$227,400

$295,500

$246,525

$769,425

The cash budget is amount of actual cash inflow and outflow is shown depreciation being a notional entry where actually cash is not paid is not taken in cash budget

The following assumptions are taken

First we make schedule of cash disbursement – selling and administrative expenses

Schedule of Expected Cash Disbursements-Selling and Administrative Expenses

January

February

March

Quarter

budgeted sales

405000

602000

317000

Salaries and wages

$35,000

$105,000

Advertising

$61,000

$183,000

Shipping(5% of budgeted sales)

$20,250

$30,100

$15,850

$66,200

Other expenses(3% of budgeted sales)

$12,150

$18,060

$9,510

$39,720

Total disbursements

$128,400

$144,160

$121,360

$393,920

The cash budget is calculated below

Cash Budget

January

February

March

Quarter

Cash balance, beginning

$60,000

$30,200

$31,940

$60,000

Add cash collections

$297,000

$444,400

$545,000

$1,286,400

Total cash available

$357,000

$474,600

$576,940

$1,346,400

Less cash disbursements

For inventory purchase

$227,400

$295,500

$246,525

$769,425

For selling and admin expenses

$128,400

$144,160

$121,360

$393,920

For purchase of equipment

3000

80000

$83,000

For cash dividends

$45,000

Total cash disbursements

$400,800

$442,660

$447,885

$1,291,345

Excess (deficiency) of cash

($43,800)

$31,940

$129,055

$55,055

Financing needed

Borrowing

74000

$74,000

repayment

-74000

($74,000)

Interest(74000*12%*3/12)

-2220

($2,220)

Net cash from financing

74000

-76220

($2,220)

Cash balance, ending

$30,200

$31,940

$52,835

Prepare an absorption costing income statement for the quarter ending March 31. Given below

Hillyard Company

Budgeted Income Statement

For the Quarter ended March 30,20XX

Sales

1324000

Less:

Cost of Goods Sold

794400

Gross Margin

529600

Less:

Operating Expenses(selling and distribution expense)

$393,920

Depreciation

45300

Operating Income

90380

Less:

Interest Expense

2220

Net Income

88160

Prepare a balance sheet as of March 31. Is given below

Hillyard Company

Budgeted Balance Sheet

For the Quarter ended March 30,20XX

Current Assets

Cash

$52,835

Account Receivable(80% of 317000)

253600

Inventory

31950

Total Current Assets

338385

Building and Equipment

$407,700

(Beginning 370000+New purchase 83000-Depreciation 45300)

Total Assets

746085

Liabilities and Equity

Account Payable(50% of 174600)

$87,300

Equity:

Common Stock

500000

Retained Earnings:

Beginning

115625

add:

Net Income

88160

Total

203785

Less:

Cash Dividend

$45,000

158785

Total Liability and Equity

746085

Schedule of Expected Cash Collections

December

January

February

March

Quarter

budgeted sales

270000

405000

602000

317000

Cash sales(20% of current month

54000

81000

120400

63400

264800

Credit sales(80% of previous month)

$216,000

$324,000

$481,600

1021600

Total Collections

297000

444400

545000

1286400

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

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

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