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Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis
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 | $ |
56,000 |
||
| Accounts receivable |
212,800 |
|||
| Inventory |
60,150 |
|||
| Buildings and equipment (net) |
366,000 |
|||
| Accounts payable | $ |
89,925 |
||
| Common stock |
500,000 |
|||
| Retained earnings |
105,025 |
|||
| $ |
694,950 |
$ |
694,950 |
-
Actual sales for December and budgeted sales for the next four months are as follows:
| December(actual) | $ |
266,000 |
| January | $ |
401,000 |
| February | $ |
598,000 |
| March | $ |
313,000 |
| April | $ |
209,000 |
-
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, $31,000 per month: advertising, $65,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,660 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 $2,600 cash. During March, other equipment will be purchased for cash at a cost of $78,000.
-
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.
Expert Solution
1.
| schedule of expected cash collections | ||||
| particulars | january | february | march | quarter |
| cash sales(20%) | 80200 | 119600 | 62600 | 262400 |
| credit sales | 212800 | 320800 | 478400 | 1012000 |
| total collections | 293000 | 440400 | 541000 | 1274400 |
credit sales collections=80% of previous month's sale
2a.
| merchandise purchase budget | ||||
| particulars | january | february | march | quarter |
| budgetted cost of goods sold | 240600 | 358800 | 187800 | 787200 |
| add:desired ending inventory | 89700 | 46950 | 31350 | 31350 |
| total needs | 330300 | 405750 | 219150 | 818550 |
| less:beginning inventory | 60150 | 89700 | 46950 | 60150 |
| required purchases | 270150 | 316050 | 172200 | 758400 |
desired ending inventory=25% of following month's cost of goods sold
opening inventory=closing inventory of previous month
2b.
| schedule of expected cash disbursemnents for merchandise purchases | ||||
| particulars | january | february | march | quarter |
| december purchases | 89925 | 89925 | ||
| january purchases | 135075 | 135075 | 270150 | |
| february purchases | 158025 | 158025 | 316050 | |
| march purchases | 86100 | 86100 | ||
| total cash disbursements for purchases | 225000 | 293100 | 244125 | 762225 |
payment for purchase is 50% during the month of purchase and remaining 50% in the following month.
3.
| cash budget | ||||
| particulars | january | february | march | quarter |
| beginning cash balance | 56000 | 30920 | 31780 | 56000 |
| add:collections from customers | 293000 | 440400 | 541000 | 1274400 |
| total cash available | 349000 | 471320 | 572780 | |
| less:cash disbursements: | ||||
| inventory purchases | 225000 | 293100 | 244125 | 762225 |
| selling and administrative expenses | 128080 | 143840 | 121040 | 392960 |
| equipment purchases | 2600 | 78000 | 80600 | |
| cash dividends | 45000 | 45000 | ||
| total cash disbursements | 398080 | 439540 | 443165 | |
| excess(deficiency)of cash | -49080 | 31780 | 129615 | |
| financing: | ||||
| borrowings | 80000 | 80000 | ||
| repayments | 80000 | 80000 | ||
| interest | 2400 | 2400 | ||
| total financing | ||||
| ending cash balance | 30920 | 31780 | 47215 |
notes:-
a)interest on loan for 3 months=80000x1%x3=2400.
b) deprecioation is a non cash expenses and hence not included in cash budget.
4.
| income statement for quarter ended march 31 | ||
| sales revenue | 1312000 | |
| cost of goods sold:- | ||
| opening inventory | 60150 | |
| add:purchases during the quarter | 758400 | |
| less:closing inventory | 31350 | 787200 |
| gross income | 524800 | |
| selling and administrative expenses: | ||
| salaries and wages | 93000 | |
| advertising | 195000 | |
| shipping | 65600 | |
| other expenses | 39360 | |
| depreciation | 44660 | |
| dividend | 45000 | |
| interest on loan | 2400 | 485020 |
| net income | 39780 |
only interest paid on loan wil include in income statement.
5.
| balancesheet as on march 31 | ||
| assets | ||
| current assets:- | ||
| cash | 47215 | |
| inventory | 31350 | |
| accounts receivable | 250400 | |
| total current assets | 328965 | |
| total fixed assets | 401940 | |
| total assets | 730905 | |
| liabilities and stockholder's equity | ||
| current loiabilities: | ||
| accounts payable | 86100 | |
| loans payable | 86100 | |
| stock holder's equity: | ||
| common stock | 500000 | |
| retained earnings | 144805 | 644805 |
| total liabilities and stockholders equity | 730905 |
retained earnings closing balance=opening balance of retained earnings+net of the current year
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