The following data relate to the operations of Shilow Company, a wholesale distr

Question

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods Current assets as of March 31 Cash Accounts receivable Inventory Building and equipment, net Accounts payable Capital stock Retained eanings $ 8,600 $ 24,400 $ 46,200 $118,800 $ 27,675 $150,000 $ 20,325 Schedule of expected cash collections Apri May June Quarter From Accounts Receivables 24400 0 Cash Sales 46200 49200 64200 159600 Credit Sales 24400 30800 32800 88000 Total Cash Collections 95000 80000 97000 272000 24400 Merchandise Purchase budget Apri May June Quarter Budgeted Cost of goods sold 57750 61500 80250 199500 add:dsired ending inventory 49200 64200 34800 34800 total needs 106950 125700 115050 234300 less:beginning inventory Required Purchases 60750 76500 50850 188100 46200 49200 64200 46200 The gross margin is 25% of sales b. Actual and budgeted sales data Schedule of expected cash disbursments April May June Quarter Amrch Purchases April Purchases 30375 30375 May Purchases June Purchases Total Disbursments 58050 68625 63675 March (actual) April May June $ 61,000 $ 77,000 $ 82,000 $107.000 $ 58,000 27675 27675 38250 38250 76500 25425 25425 190350 C. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales d Each month's ending inventory should equal 80% of the following month's budgeted cost of goods sold e. One-half of a month's inventory purchases is paid for in the month of purchase, the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory f. Monthly expenses are as follows: commissions, 12% of sales, rent, $3,400 per month, other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $891 per month (includes depreciation on new assets). g. Equipment costing $2,600 will be purchased for cash in April h. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. 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, up to a total loan balance of $20,000. 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.

Explanation / Answer

Part 1 : Shilow Company

Cash Budget (Amount in $)

Working Notes:-

1) Cash collections and cash psid for inventory are given in the question.

2) Company can borrow in increments of $1,000 and $4,000 is the minimum required balance to be maintained, therefore the company should borrow amount of $3,000 in the month of April as its closing balance before borrowing is $1,290. similarly for the month of may it should borrow amount of $7,000.

3) Interest on loan is to be paid in the end of quarter. Loan is borrowed in the beginning of month. The interest is charged for three months at the rate of 1% per month on the amount of $3,000 (i.e.$3,000*3% = $90) and the interest is charged for two months on the amount of $7,000 (i.e.$7,000*2% = $140). Therefore total interest will be $230($90+$140).

Part 2 : Shilow Company

Income statement for the quarter ended june 30 (Amount in $)

Part 3 : Shilow Company

Balance Sheet as on June 30 (Amount in $)

Particulars April May June Quarter Beginning cash balance 8,600 4,290 4,505 8,600 Add: cash collections 70,600 80,000 97,000 247,600 Total cash Available 79,200 84,290 101,505 256,200 Less: cash disbursements For inventory 58,050 68,625 63,675 190,350 For expenses [(18% of sales)+3,400] 17,260 18,160 22,660 58,080 For equipment 2,600 - - 2,600 Total cash disbursements 77,910 86,785 86,335 251,030 Excess (Deficiency) of cash 1,290 (2,495) 15,170 5,170 Financing: Borrowings 3,000 7,000 - 10,000 Repayments - - -10,000 -10,000 Interest - - -230 -230 Total financing 3,000 7,000 -10,230 -230 Ending cash balance 4,290 4,505 4,940 4,940

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