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 $ 55,000 Accounts receivable 212,000 Inventory 60,000 Buildings and equipment (net) 365,000 Accounts payable $ 89,625 Common stock 500,000 Retained earnings 102,375 $ 692,000 $ 692,000 Actual sales for December and budgeted sales for the next four months are as follows: December(actual) $ 265,000 January $ 400,000 February $ 597,000 March $ 312,000 April $ 208,000 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, $30,000 per month: advertising, $66,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,500 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 $2,500 cash. During March, other equipment will be purchased for cash at a cost of $77,500. 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 400,000 597,000 312,000 1,309,000 208,000 Beginning Accounts Receivable December Credit sales (265,000*.8) 212,000 212,000 January sales 80,000 320,000 400,000 February sales 119,400 477,600 597,000 March sales 62,400 62,400 Total collections 292,000 439,400 540,000 1,271,400 Account receivable for March sale 249,600 Hillyard Company Merchandise Purchase Budget For the quarter ended March 31 Month Particulars January February March Total Cost of goods sold (60% of sales) 240,000 358,200 187,200 785,400 124800 Add: Desired Ending merchandise inventory (25% of next month COGS) 89,550.0 46,800.0 31,200.0 31,200 Total needs 329,550 405,000 218,400 816,600 Less: beginning merchandise inventory 60,000 89,550 46,800 60,000 269,550 315,450 171,600 756,600 Hillyard Company Schedule of expected Cash payments For the quarter ended March 31 Month Particulars January February March Total Beginning Accounts Payable (a) $89,625 $89,625 January Purchases (b) $134,775 $134,775 $269,550 February Purchases (c ) $157,725 $157,725 $315,450 March Purchases (d) $85,800 $85,800 Total payments (a+b+c+d) $224,400 $292,500 $243,525 $760,425 Hillyard Company Cash Budget For the quarter ended March 31 Month Particulars January February March Total Beginning Cash balance 55,000 30,600 31,240 55,000 Add: Collection from customers $292,000 $439,400 $540,000 1,271,400 cash available for use $347,000 $470,000 $571,240 $1,326,400 Less: cash Disbursements Merchandise purchase $224,400 $292,500 $243,525 760,425 Salaries and wages 30,000 30,000 30,000 90,000 Advertising 66,000 66,000 66,000 198,000 Shipping (5% of sales) 20,000 29,850 15,600 65,450 Other exp (3% of sales) 12,000 17,910 9,360 39,270 New Copy machine 0 2,500 0 2,500 Equipment purchase 0 77,500 77,500 Dividend paid 45,000 45000 Total disbusrement 397,400 438,760 441,985 1,278,145 Cash surplus/Deficit -50,400 31,240 129,255 48,255 Financing    Borrowing 81,000 81,000    Repayment 81,000 -81,000    Interest 1620 -1,620 Net cash from Financing 81,000 0 -82,620 -1,620 Budgeted ending cash balance 30,600 31,240 46,635 46,635 Hillyard Company Budgeted Income Statement For the quarter ended March 31 Particulars Amount ($) Amount ($) Sales 1,309,000 Less: Cost of goods sold (60% of sales) 785,400 Gross margin 523,600 Less: Selling and administartive exp Depreciation (44,500) 44,500 Salaries and wages 90,000 Advertising 198,000 Shipping Charges 65,450 Other expenses 39,270 437,220 Net operating Income 86,380 Interest expense 1,620 Net Income 84,760 Dividend Paid 45,000 Net Income 39,760 Hillyard Company Budgeted balance Sheet Mar-31 Assets Cash 46,635 Accounts Receivable 249,600 Inventory 31,200 Buildings and equipment Net (365,000+2,500+77,500-44,500) 400,500 Total assets 727,935 Liabilities and Stockholders' Equity Accounts Payable purchases 85,800 Common Stock 500,000 Retained earnings (102,375+39,760) 142,135 Total liabilities and stockholders' equity 727,935

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