Hillyard Company, an office supplies specialty store, prepares its master budget
ID: 2541576 • 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 preparation of the master budget for the first quarter: a. As of December 31 (the end of the prior quarter), the company's general ledger showed the following account balances: Credits Cash Accounts receivable Inventory Buildings and equipment (net) Accounts payable Capital shares Retained earnings Debits $ 46,000 232,000 57,000 375,000 $ 96,000 505,000 109,000 $710,000 $710,000 b. Actual sales for December and budgeted sales for the next four months are as follows: December (actual) January February March April $290,000 380,000 530,000 230,000 190,000 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. e. Monthly expenses are budgeted as follows: salaries and wages, $29,000 per month; advertising, $70,000 per month; shipping, 5% of sales; depreciation, $14,000 per month; other expenses, 3% of sales. f. At the end of each month, inventory is to be on hand equal to 25% of the following month's sales needs, stated at cost. g. One-half of a month's inventory purchases are paid for in the month of purchase; the other half are paid for in the following month. h. During February, the company will purchase a new copy machine for $6,400 cash. During March, other equipment will be purchased for cash at a cost of $75,000. i. During January, the company will declare and pay $43,000 in cash dividends. j. The company must maintain a minimum cash balance of $32,000. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month. Borrowings and repayments of principal must be in multiples of $1,000. Interest is paid only at the time of payment of principal. The annual interest rate is 12%. (Figure interest on whole months, e.g., 1/12, 2/12.)Explanation / Answer
Solution:
Part 1 --- Schedule of Expected Cash Collection
Schedule of Expected Cash Collections
January
February
March
Quarter
Cash sales (A)
$76,000
$106,000
$46,000
$228,000
Collection from Sales on account (credit sales I.e. 80% of total sales of a month are collected in the month of following sales)
$232,000
(Dec Sales 290,000*80% collected in Jan)
(given in B/S)
$304,000
(Jan Sales 380,000*80% collected in Feb)
$424,000
(Feb Sales 530,000*80% collected in March)
$960,000
Total Cash collection
$308,000
$410,000
$470,000
$1,188,000
Part 2(a) --- Inventory Purchase Budget
Inventory Purchase Budget
January
February
March
Quarter
April
Budgeted Cost of Goods Sold (Expected Sales * 60%) (Refer Note 1)
$228,000
(380,000*60%)
$318,000
(530,000*60%)
$138,000
(230,000*80%)
$114,000
(190,000*60%)
Plus: Desired Ending inventory (25% of next month’s sales needs, at cost i.e. COGS)
$79,500
$34,500
$28,500
(April 114,000*25%)
Total Needs
$307,500
$352,500
$166,500
Less: Expected Beginning Inventory (Ending Inventory of Last quarter)
$57,000
$79,500
$34,500
Budgeted Purchases
$250,500
$273,000
$132,000
$655,500
Note 1 – Gross Margin Ratio is given 40%, It means Cost of Goods Sold is 60% of Sales.
Part 2(b) --- Schedule of cash disbursements for purchases
Schedule of Cash Disbursements for Purchases
January
February
March
Quarter
December Purchases
$96,000
January Purchases
$125,250
$125,250
February Purchases
$136,500
$136,500
March Purchases
$66,000
Total cash disbursements for purchases
$221,250
$261,750
$202,500
$685,500
Part 3 – Schedule of Cash disbursements for expenses
Schedule of Cash disbursements for expenses
January
February
March
Quarter
Salaries and Wages
$29,000
$29,000
$29,000
$87,000
Advertising
$70,000
$70,000
$70,000
$210,000
Shipping (5% of Sales)
$19,000
$26,500
$11,500
$57,000
Other expenses (3% of sales)
$11,400
$15,900
$6,900
$34,200
Total cash disbursements for operating expenses
$129,400
$141,400
$117,400
$388,200
Note – Depreciation is a non cash item. It does not involve any cash flow. Hence it is not considered in cash disbursements for expenses budget.
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Pls ask separate question for remaining parts.
Schedule of Expected Cash Collections
January
February
March
Quarter
Cash sales (A)
$76,000
$106,000
$46,000
$228,000
Collection from Sales on account (credit sales I.e. 80% of total sales of a month are collected in the month of following sales)
$232,000
(Dec Sales 290,000*80% collected in Jan)
(given in B/S)
$304,000
(Jan Sales 380,000*80% collected in Feb)
$424,000
(Feb Sales 530,000*80% collected in March)
$960,000
Total Cash collection
$308,000
$410,000
$470,000
$1,188,000
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