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:

Actual sales for December and budgeted sales for the next four months are as follows:

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, $27,000 per month: advertising, $67,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,020 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 $2,200 cash. During March, other equipment will be purchased for cash at a cost of $76,000.

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:

*$397,000 sales × 60% cost ratio = $238,200.

†$356,400 × 25% = $89,100.

  

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.

Debit Credit Cash $ 52,000 Accounts receivable 209,600 Inventory 59,550 Buildings and equipment (net) 362,000 Accounts payable $ 88,725 Common stock 500,000 Retained earnings 94,425 $ 683,150 $ 683,150

Explanation / Answer

1.

2. a: Merchandise purchases budget:

3. Cash budget:

4. Income statement:

5. Balancesheet:

workings:

Interest = 83000*1%*2 months= 1660

Loan repayments= 83000+1660= 84660

Schedule of expected cash collections Jan Feb Mar Quarter Sales 397000 594000 308000 1299000 Cash sales 20% 79400 118800 61600 259800 Credit sales 80% 317600 475200 246400 1039200 Cash collections: Current month's cash sales 79400 118800 61600 259800 Collections of credit sales 209600 317600 475200 1002400 Total cash receipts 289000 436400 536800 1262200

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