Question
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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:
| Debits | Credits | |||
| Cash | $ | 64,000 | ||
| Accounts receivable | 219,200 | |||
| Inventory | 61,350 | |||
| Buildings and equipment (net) | 374,000 | |||
| Accounts payable | $ | 92,325 | ||
| Common stock | 500,000 | |||
| Retained earnings | 126,225 | |||
| $ | 718,550 | $ | 718,550 | |
Actual sales for December and budgeted sales for the next four months are as follows:
| December (actual) | $ | 274,000 |
| January | $ | 409,000 |
| February | $ | 606,000 |
| March | $ | 321,000 |
| April | $ | 217,000 |
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, $39,000 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 $45,940 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 $3,400 cash. During March, other equipment will be purchased for cash at a cost of $82,000.
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.
Answers
(1)
Schedule of Expected Cash Collections January February March Quarter Cash Sales $ 79,400 $ 1,18,800 $ 61,600 $ 2,59,800 Credit Sales $ 2,09,600 $ 3,17,600 $ 4,75,200 $ 10,02,400 Total Collections $ 2,89,000 $ 4,36,400 $ 5,36,800 $ 12,62,200 (2a)
Merchandise Purchases Budget January February March Quarter Budgeted Cost of goods sold $ 2,38,200 $ 3,56,400 $ 1,84,800 $ 7,79,400 Add desired ending inventory $ 89,100 $ 46,200 $ 30,750 $ 30,750 Total needs $ 3,27,300 $ 4,02,600 $ 2,15,550 $ 8,10,150 Less beginning inventory $ 59,550 $ 89,100 $ 46,200 $ 59,550 Required purchases $ 2,67,750 $ 3,13,500 $ 1,69,350 $ 7,50,600 (2b)
Schedule of Expected Cash Disbursement January February March Quarter December Purchases $ 88,725 $ 88,725 January Purchases $ 1,33,875 $ 1,33,875 $ 2,67,750 February Purchases $ 1,56,750 $ 1,56,750 $ 3,13,500 March Purchases $ 84,675 $ 84,675 Total Cash disbursements for purhcases $ 2,22,600 $ 2,90,625 $ 2,41,425 $ 7,54,650 (3)
Cash Budget January February March Quarter Beginning Cash Balance $ 52,000 $ 30,640 $ 32,695 $ 52,000 Add Cash Collections $ 2,89,000 $ 4,36,400 $ 5,36,800 $ 12,62,200 Total cash available $ 3,41,000 $ 4,67,040 $ 5,69,495 $ 13,14,200 Less cash disbursements: Purchases of inventory $ 2,22,600 $ 2,90,625 $ 2,41,425 $ 7,54,650 Selling and administrative expenses $ 1,25,760 $ 1,41,520 $ 1,18,640 $ 3,85,920 Purchases of equipment $ 2,200 $ 76,000 $ 78,200 Cash dividends $ 45,000 $ 45,000 Total cash disbursements $ 3,93,360 $ 4,34,345 $ 4,36,065 $ 12,63,770 Excess (deficiency) of cash $ -52,360 $ 32,695 $ 1,33,430 $ 50,430 Financing: Borrowings $ 83,000 0 0 $ 83,000 Repayments 0 0 $ -83,000 $ -83,000 Interest 0 0 $ -2,490 $ -2,490 Total financing $ 83,000 0 $ -85,490 $ -2,490 Ending cash balance $ 30,640 $ 32,695 $ 47,940 $ 47,940 Explanations:
Selling and administrative expenses January February March Quarter Salaries & Wages $ 27,000 $ 27,000 $ 27,000 $ 81,000 Advertising $ 67,000 $ 67,000 $ 67,000 $ 2,01,000 Shipping $ 19,850 $ 29,700 $ 15,400 $ 64,950 Other expenses $ 11,910 $ 17,820 $ 9,240 $ 38,970 $ 1,25,760 $ 1,41,520 $ 1,18,640 $ 3,85,920 (4)
Income Statement For the Quarter Ended March 31 Sales $ 12,99,000 Cost of goods sold: Beginning Inventory $ 59,550 Purchases $ 7,50,600 Goods available for sale $ 8,10,150 Ending inventory $ 30,750 $ 7,79,400 Gross margin $ 5,19,600 Selling and administrative expenses: Salaries and wages $ 81,000 Advertising $ 2,01,000 Shipping $ 64,950 Depreciation $ 44,020 Other expenses $ 38,970 $ 4,29,940 Net operating income $ 89,660 Interest expense $ 2,490 Net income $ 87,170 (5)
Balance Sheet March 31 Assets Current Assets: Cash $ 47,940 Accounts receivable ($308000 * 80%) $ 2,46,400 Inventory $ 30,750 Total Current assets $ 3,25,090 Building & Equipment, net ($362000 + $2200 + $76000 - $44020) $ 3,96,180 Total assets $ 7,21,270 Liabilities & Stockholders' Equity Current Liabilities: Accounts Payable $ 84,675 Stockholders' Equity: Common Stock $ 5,00,000 Retained Earnings ($94425 + $87170 - $45000) $ 1,36,595 $ 6,36,595 Total liabilities & stockholders' equity $ 7,21,270
