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:

41,000

200,800

57,900

351,000

85,425

500,000

65,275

650,700

650,700

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

251,000

386,000

583,000

297,000

194,000

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, $16,000 per month: advertising, $56,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,260 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 $1,100 cash. During March, other equipment will be purchased for cash at a cost of $70,500.

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 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 $

41,000

Accounts receivable

200,800

Inventory

57,900

Buildings and equipment (net)

351,000

Accounts payable $

85,425

Common stock

500,000

Retained earnings

65,275

$

650,700

$

650,700

Explanation / Answer

Required Budgets are as prepared below:

Hillyard Company Schedule of expected Cash collections For the quarter ended March 31 Month Particulars January February March Total Sales 386,000 583,000 297,000 1,266,000 194,000 Beginning Accounts Receivable December Credit sales (251,000*.8) 200,800 200,800 January sales 77,200 308,800 386,000 February sales 116,600 466,400 583,000 March sales 59,400 59,400 Total collections 278,000 425,400 525,800 1,229,200 Account receivable for March sale 237,600 Hillyard Company Merchandise Purchase Budget For the quarter ended March 31 Month Particulars January February March Total Cost of goods sold (60% of sales) 231,600 349,800 178,200 759,600 116400 Add: Desired Ending merchandise inventory (25% of next month COGS) 87,450.0 44,550.0 29,100.0 29,100 Total needs 319,050 394,350 207,300 788,700 Less: beginning merchandise inventory 57,900 87,450 44,550 57,900 Required purchase 261,150 306,900 162,750 730,800 Hillyard Company Schedule of expected Cash payments For the quarter ended March 31 Month Particulars January February March Total Beginning Accounts Payable (a) $85,425 $85,425 January Purchases (b) $130,575 $130,575 $261,150 February Purchases (c ) $153,450 $153,450 $306,900 March Purchases (d) $81,375 $81,375 Total payments (a+b+c+d) $216,000 $284,025 $234,825 $734,850 Hillyard Company Cash Budget For the quarter ended March 31 Month Particulars January February March Total Beginning Cash balance 41,000 31,120 52,755 41,000 Add: Collection from customers $278,000 $425,400 $525,800 1,229,200 cash available for use $319,000 $456,520 $578,555 $1,270,200 Less: cash Disbursements Merchandise purchase $216,000 $284,025 $234,825 734,850 Salaries and wages 16,000 16,000 16,000 48,000 Advertising 56,000 56,000 56,000 168,000 Shipping (5% of sales) 19,300 29,150 14,850 63,300 Other exp (3% of sales) 11,580 17,490 8,910 37,980 New Copy machine 0 1,100 0 1,100 Equipment purchase 0 70,500 70,500 Dividend paid 45,000 45000 Total disbusrement 363,880 403,765 401,085 1,168,730 Cash surplus/Deficit -44,880 52,755 177,470 101,470 Financing    Borrowing 76,000 76,000    Repayment 76,000 -76,000    Interest 1520 -1,520 Net cash from Financing 76,000 0 -77,520 -1,520 Budgeted ending cash balance 31,120 52,755 99,950 99,950 Hillyard Company Budgeted Income Statement For the quarter ended March 31 Particulars Amount ($) Amount ($) Sales 1,266,000 Less: Cost of goods sold (60% of sales) 759,600 Gross margin 506,400 Less: Selling and administartive exp Depreciation 42,260 Salaries and wages 48,000 Advertising 168,000 Shipping Charges 63,300 Other expenses 37,980 359,540 Net operating Income 146,860 Interest expense 1,520 Net Income 145,340 Dividend Paid 45,000 Net Income 100,340 Hillyard Company Budgeted balance Sheet Mar-31 Assets Cash 99,950 Accounts Receivable 237,600 Inventory 29,100 Buildings and equipment Net (351,000+1,100+70,500-42,260) 380,340 Total assets 746,990 Liabilities and Stockholders' Equity Accounts Payable purchases 81,375 Common Stock 500,000 Retained earnings (65,275+100,340) 165,615 Total liabilities and stockholders' equity 746,990

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