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: a. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances: Cash $ 57,000 Accounts receivable 213,600 Inventory 60,300 Buildings and equipment (net) 367,000 Accounts payable $ 90,225 Common stock 500,000 Retained earnings 107,675 $ 697,900 $ 697,900 b. Actual sales for December and budgeted sales for the next four months are as follows: December(actual) $267,000 January $402,000 February $599,000 March $314,000 April $210,000 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. (In other words, cost of goods sold is 60% of sales.) e. Monthly expenses are budgeted as follows: salaries and wages, $32,000 per month: advertising, $64,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,820 for the quarter. f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold. g. 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. h. During February, the company will purchase a new copy machine for $2,700 cash. During March, other equipment will be purchased for cash at a cost of $78,500. i. During January, the company will declare and pay $45,000 in cash dividends. j. 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: *$402,000 sales × 60% cost ratio = $241,200. †$359,400 × 25% = $89,850. 2-b. Schedule of expected cash disbursements for merchandise purchases: 3. Cash budget. (Cash deficiency, repayments and interest should be indicated by a minus sign.) 4. Prepare an absorption costing income statement for the quarter ending March 31. 5. Prepare a balance sheet as of March 31.

Explanation / Answer

1 Schedule of expected cash collections for Quarter 1 Particulars January February March Q1 Sales $402,000 $599,000 $314,000 $1,315,000 Cash collected (20% of present month Sales on cash) $80,400 $119,800 $62,800 $263,000 Cash collected (80% of previous month sales on credit) $213,600 $321,600 $479,200 $1,014,400 Cash collected $294,000 $441,400 $542,000 $1,277,400 2a Merchandise Purchase Budget Particulars January February March Q1 Sales $402,000 $599,000 $314,000 $1,315,000 Opening Stock $60,300 $89,850 $47,100 $60,300 Cost of good sold (60% of sales) $241,200 $359,400 $188,400 $789,000 Closing stock (25% of next month cost of good sold $89,850 $47,100 $31,500 $31,500 Purchases during the month (Cost of good sold + closing stock - opening stock) $270,750 $316,650 $172,800 $172,800 2b Schedule of expected cash disbursements for merchandise purchase Particulars January February March Q1 Purchases during the month $270,750 $316,650 $172,800 $760,200 Cash paid (50% of current month purchases) $135,375 $158,325 $86,400 $380,100 Cash paid (50% of previous month purchase) $90,225 $135,375 $158,325 $383,925 Total cash disbursements $225,600 $293,700 $244,725 $764,025 3 Cash Budget Particulars January February March Q1 Opening Cash $57,000 $30,240 $31,320 $57,000 Collection from sales $294,000 $441,400 $542,000 $1,277,400 Disbursements for purchases -$225,600 -$293,700 -$244,725 -$764,025 Salaries and wages -$32,000 -$32,000 -$32,000 -$96,000 Advertising -$64,000 -$64,000 -$64,000 -$192,000 Shipping -$20,100 -$29,950 -$15,700 -$65,750 Other expenses -$12,060 -$17,970 -$9,420 -$39,450 Dividend -$45,000 -$45,000 New Copy machine -$2,700 -$2,700 Other equipment -$78,500 -$78,500 Closing balance -$47,760 $31,320 $128,975 Desired Closing Balance $30,000 $30,000 $30,000 Bank loan taken (Desired closing balance - Closing balance) in nearest 1000 $78,000 $78,000 Bank loan repayment -$78,000 -$78,000 Interest on bank loan (78000*1%*3) assuming loan was taken at beginning of month -$2,340 -$2,340 Actual closing balance after loan $30,240 $31,320 $48,635 $48,635 4 Income statement for quarter ended Particulars Q1 Sales $1,315,000 Cost of goods sold -$789,000 Gross Profit $526,000 Salaries and wages -$96,000 Advertising -$192,000 Shipping (5% of sales) -$65,750 Other expenses (3% of sales) -$39,450 Depreciation -$44,820 Bank Interest -$2,340 income for the period $85,640 5 Balance sheet as of 31st March Assets Cash $48,635 Accounts Receivable (314000*80%) $251,200 Inventory $31,500 Building and Equipment (Net) (367000+78500+2700-44820) $403,380 Total Assets $734,715 Liabilities Accounts payable (50% of 172800) $86,400 Shareholders Equity Stock $500,000 Retained earnings (107675+85640-45000) $148,315 $648,315 Total Liabilities and stockholders' equity $734,715 Working sheet for calculations Particulars Dec Jan Feb Mar Quarter April Projected Sales $267,000 $402,000 $599,000 $314,000 $1,315,000 $210,000 Opening Inventory $60,300 $89,850 $47,100 $60,300 Cost of Good sold (60%) $241,200 $359,400 $188,400 $789,000 $126,000 Salaries and wages $32,000 $32,000 $32,000 $96,000 Advertising $64,000 $64,000 $64,000 $192,000 Shipping (5% of sales) $20,100 $29,950 $15,700 $65,750 Other expenses (3% of sales) $12,060 $17,970 $9,420 $39,450 Depreciation $44,820 Ending Inventory (25% of next month Cost of Good Sold) $60,300 $89,850 $47,100 $31,500 $31,500 Purchases during the month (Cost of good sold + closing stock - opening stock) $270,750 $316,650 $172,800

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