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 Accounts receivable Inventory Buildings and equipment (net) Accounts payable Common stock Retained earnings $ 62,000 217,600 61,050 372,000 $ 91,725 500,000 120,925 $ 712,650 $ 712,650 b. Actual sales for December and budgeted sales for the next four months are as follows December (actual) January February March April $272,000 $407,000 $604,000 $319,000 $215,000 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 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, $37,000 per month advertising, $59,000 per month; shipping, 5% of sales, other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,620 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 $3,200 cash. During March, other equipment will be purchased for cash at a cost of $81,000 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: 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

Requirement 1: Schedule of expected Cash collections Jan Feb March Quarter Cash sales 81400 (407,000*20%) 120,800 (604,000*20%) 63,800 (319,000*20%)                      2,66,000 Credit sales 217,600 (272,000*80%) 325,600 (407,000*80%) 483,200 (604,000*80%)                   10,26,400 Total Collections 2,99,000                           4,46,400 5,47,000                   12,92,400 Requirement 2 : Merchandise purchase budget Jan Feb March Quarter Budgeted cost of goods sold (Note 1) 2,44,200                           3,62,400 1,91,400                      7,98,000 Add desired ending inventory (Next month sales's cost of goods sold *25%) 90,600 (362,400*.25) 47,850 (191,400*.25) 32,250 (129,000*.25)                      1,70,700 Total needs 3,34,800 4,10,250 2,23,650 9,68,700 Less - Opening inventory (Desired inventory as calculated above) 61,050 90,600 47,850 1,99,500 Required purchases 2,73,750 3,19,650 1,75,800 7,69,200 Note 1: Budgeted cost of goods sold Month Expected Sales % of cost Cost of goods sold Jan 407000 0.6 244200 Feb 604000 0.6 362400 March 319000 0.6 191400 april 215000 0.6 129000 Requirement 3: Expected cash disbursements for Merchandise purchase Jan Feb March Quarter December purchase 91,725 -   -   91,725 January purchases 1,36,875 1,36,875 -   2,73,750 (273,750*.5) (273,750*.5) February purchases -   1,59,825 1,59,825 3,19,650 (319,650*.5) (319,650*.5) March purchases -   -   87,900 87,900 (175,800*.5) 2,28,600 2,96,700 2,47,725 7,73,025 Requirement 4: Cash Budget Opening Cash Balance 62,000 30,000 30,000 Cash collections 2,99,000 4,46,400 5,47,000 total cash balance 3,61,000 4,76,400 5,77,000 Less : Cash disbursements Inventory purachse 2,28,600 2,96,700 2,47,725 Selling and admin expense 1,28,560 1,44,320 1,21,520 Equipment purchase -   3,200 81,000 Cash dividends 45,000 -   -   total Cash disbursements 4,02,160 4,44,220 4,50,245 Excess/(Deficiency) of cash (41,160) 32,180             1,26,755 Financing Borrowing 71,160 -   -   Repaymet -   1,880 69,280 Interest -   300 693 Total finance 71,160 (2,180) (69,973) End Cash Balance 30,000 30,000 56,782 Requirement 5: Income statement Sales (A) 13,30,000 Cost of goods sold Material purcahsed 7,69,200 Opening inventory 61,050 less: Closing stock 32,250 Cost of goods sold (B) 7,98,000 Selling and admin expense 3,94,400 Depreciation 45,620 Interest Cost 993 Selling and admin expense (C) 4,41,013 Income (A-B-C) 90,987 Requirement 6 : Balance Sheet Assets Amount on $ Remarks Current assets Cash 56,782 From Requirement 4 Accounts Rece. 2,55,200 (Sale of March : 319000*80%) Inventory 32,250 From Requirement 3 . Desired inventory at the end of March Total Current assets 3,44,232 Building and Equipments (net) 4,10,580 (372000+3200+81000-45620) Total assets 7,54,812 Current liabilities Account 87,900 (March Purchase 175800*50%) Total Current liabilities Shareholders equity Common Stock 5,00,000 Retained earnings 1,66,912 (Opening : 120925 + Income of quarter : 90,987 - Dividend : 45000) Total liabilities and Shareholders equity 7,54,812

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