Hillyard Company, an office supplies specialty store, prepares its master budget
ID: 2536404 • 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:
Debit
Credit
Cash
$
46,000
Accounts receivable
204,800
Inventory
58,650
Buildings and equipment (net)
356,000
Accounts payable
$
86,925
Common stock
500,000
Retained earnings
78,525
$
665,450
$
665,450
Actual sales for December and budgeted sales for the next four months are as follows:
December(actual)
$
256,000
January
$
391,000
February
$
588,000
March
$
302,000
April
$
199,000
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, $21,000 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 $43,060 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 $1,600 cash. During March, other equipment will be purchased for cash at a cost of $73,000.
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
Schedule of Expected Cash Collections
January
February
March
Quarter
Cash sales
$78,200
$117,600
$60,400
$256,200
Credit sales
204,800
312,800
470,400
988,000
Total collections
$283,000
$430,400
$530,800
$1,244,200
2-a. Merchandise purchases budget:
Merchandise Purchases Budget
January
February
March
Quarter
Budgeted cost of goods sold
234,600*
$352,800
Add desired ending inventory
88,200†
Total needs
322,800
352,800
0
0
Less beginning inventory
58,650
Required purchases
$264,150
$352,800
$0
$0
*$391,000 sales × 60% cost ratio = $234,600.
†$352,800 × 25% = $88,200.
2-b. Schedule of expected cash disbursements for merchandise purchases:
Schedule of Expected Cash Disbursements for Merchandise Purchases
January
February
March
Quarter
December purchases
$86,925
$86,925
January purchases
132,075
132,075
264,150
February purchases
0
March purchases
0
Total cash disbursements for purchases
$219,000
$132,075
$0
$351,075
Explanation / Answer
(1) Statement of Expected cash collection:-
January
Feb
March
Quarter
Cash sales
78200
117600
60400
256200
Credit Sales
204800
312800
470400
988000
Total collections
283000
430400
530800
1244200
(2) Merchandise Purchase Budget :-
January
Feb
March
Quarter
Budgeted COGS
234600
352800
181200
768600
Add:- Desired ending Inventory
(352800*25%)
=88200
(181200*25%)
=45300
(119400*25%)
=29850
Total needs
322800
398100
211050
931950
Less:- Beginning Inventory
58650
88200
45300
Required Purchases
264150
309900
165750
739800
Working Note = COGS
January
Feb
March
April
Budgeted sale
391000
588000
302000
199000
COGS (60%)
234600
352800
181200
119400
(2b) Expected cash disbursement for merchandise purchase :-
January
Feb
March
Quarter
December purchases
86925
----
-------
86925
January purchases
(264150/2)
=132075
(264150/2)
=132075
------
264150
Feb purchases
-----
(309900/2)
=154950
(309900/2)
=154950
309900
March purchases
-----
------
(165750/2)
=82875
82875
Total cash disbursement for purchases
219000
287025
237825
743850
January
Feb
March
Quarter
Cash sales
78200
117600
60400
256200
Credit Sales
204800
312800
470400
988000
Total collections
283000
430400
530800
1244200
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