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: Cash $ 42,000 Accounts receivable 201,600 Inventory 58,050 Buildings and equipment (net) 352,000 Accounts payable $ 85,725 Common stock 500,000 Retained earnings 67,925 $ 653,650 $ 653,650 Actual sales for December and budgeted sales for the next four months are as follows: December(actual) $ 252,000 January $ 387,000 February $ 584,000 March $ 298,000 April $ 195,000 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, $17,000 per month: advertising, $57,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,420 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 $1,200 cash. During March, other equipment will be purchased for cash at a cost of $71,000. 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.

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 387,000 584,000 298,000 1,269,000 Beginning Accounts Receivable December Credit sales (252,000*.8) 201,600 201,600 January sales 77400 309,600 387,000 February sales 116,800 467,200 584,000 March sales 59,600 59,600 Total collections 279,000 426,400 526,800 1,232,200 Account receivable for March sale 238,400 Hillyard Company Merchandise Purchase Budget For the quarter ended March 31 Month Particulars January February March Total Cost of goods sold (60% of sales) 232,200 350,400 178,800 761,400 Add: Desired Ending merchandise inventory 87,600.0 44,700.0 29,550.0 29,550 Total needs 319,800 395,100 208,350 790,950 Less: beginning merchandise inventory 58,050 87,600 44,700 58,050 Required purchase 261,750 307,500 163,650 732,900 Hillyard Company Schedule of expected Cash payments For the quarter ended March 31 Month Particulars January February March Total Beginning Accounts Payable (a) $85,725 $85,725 January Purchases (b) $130,875 $130,875 $261,750 February Purchases (c ) $153,750 $153,750 $307,500 March Purchases (d) $81,825 $81,825 Total payments (a+b+c+d) $216,600 $284,625 $235,575 $736,800 Hillyard Company Cash Budget For the quarter ended March 31 Month Particulars January February March Total Beginning Cash balance 42,000 31,440 51,295 42,000 Add: Collection from customers $279,000 $426,400 $526,800 1,232,200 cash available for use $321,000 $457,840 $578,095 $1,274,200 Less: cash Disbursements Merchandise purchase $216,600 $284,625 $235,575 736,800 Salaries and wages 17,000 17,000 17,000 51,000 Advertising 57,000 57,000 57,000 171,000 Shipping (5% of sales) 19,350 29,200 14,900 63,450 Other exp (3% of sales) 11,610 17,520 8,940 38,070 New Copy machine 0 1,200 0 1,200 Equipment purchase 0 71,000 71,000 Dividend paid 45,000 45000 Total disbusrement 366,560 406,545 404,415 1,177,520 Cash surplus/Deficit -45,560 51,295 173,680 96,680 Financing    Borrowing 77,000 77,000    Repayment 77,000 -77,000    Interest 1540 -1,540 Net cash from Financing 77,000 0 -78,540 -1,540 Budgeted ending cash balance 31,440 51,295 95,140 95,140 Hillyard Company Budgeted Income Statement For the quarter ended March 31 Particulars Amount ($) Amount ($) Sales 1,269,000 Less: Cost of goods sold (60% of sales) 761,400 Gross margin 507,600 Less: Selling and administartive exp Depreciation 42,420 Salaries and wages 51,000 Advertising 171,000 Shipping Charges 63,450 Other expenses 38,070 365,940 Net operating Income 141,660 Interest expense 1,540 Net Income 140,120 Dividend Paid 45,000 Net Income 95,120 Hillyard Company Budgeted balance Sheet Mar-31 Assets Cash 95,140 Accounts Receivable 238,400 Inventory 29,550 Property and equipment Net 381,780 Total assets 744,870 Liabilities and Stockholders' Equity Accounts Payable purchases 81,825 Common Stock 500,000 Retained earnings (67,925+95,120) 163,045 Total liabilities and stockholders' equity 744,870

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