Accounting

 

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:

1. As of December 31, (the end of the prior quarter), the company’s general ledger showed the following account balances:
   

   Cash $48,000 (debit)
   
   Accounts receivable $224,000 (debit)
   
   Inventory $60,000 (debit)
   
   Buildings and equipment, net $370,000 (debit)
   
   Accounts payable $93,000 (credit)
   
   Capital stock $500,000 (credit)
   
   Retained earnings $109,000 (credit)

2. Actual sales for December and budgeted sales for the next four months are as follows:  December $280,000, January $400,000, February $600,000, March $300,000 and April $200,000.
3. 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.
4. The company’s gross margin is 40% of sales.  (In other words, cost of goods sold is 60% of sales.) 
5. Monthly expenses are budgeted as follows:  salaries and wages, $27,000 per month; advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales.  Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 per quarter.
6. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.
7. One half of the month’s inventory purchases is paid for in the month of purchase; the other half is paid in the following month.
8. During February, the company will purchase a new copy machine for $1,700 cash.  During March, other equipment will be purchased for cash at a cost of $84,500.
9. During January, the company will declare and pay $45,000 in cash dividends.
10. 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
   

   Schedule of Expected Cash Collections
   	January	February	March	Quarter
   Cash sales	$80,000
   Credit sales	$224,000
   Total Collections	$304,000

2. Merchandise purchases budget:
   

   Merchandise Purchases Budget
   	January	February	March	Quarter
   Budgeted Cost of Goods Sold	$240,000*	$360,000
   Add desired ending inventory	$90,000**
   Total needs	$330,000
   Less beginning inventory	$60,000
   Required purchases	$270,000

   *$400,000 sales x 60% cost ratio = $240,000
   ** $360,000 x 25% = $90,000

   Schedule of Expected Cash Disbursements-Merchandise Purchases
   	January	February	March	Quarter
   December purchases	$93,000			$93,000
   January purchases	$135,000	$135,000		$270,000
   February purchases
   March purchases
   Total disbursements	$228,000

3. Complete the following:
   

   Schedule of Expected Cash Disbursements-Selling and Administrative Expenses
   	January	February	March	Quarter
   Salaries and wages	$27,000
   Advertising	$70,000
   Shipping	$20,000
   Other expenses	$12,000
   Total disbursements	$129,000

4. Complete the following cash budget:
   

   Cash Budget
   	January	February	March	Quarter
   Cash balance, beginning	$48,000
   Add cash collections	$304,000
   Total cash available	$352,000
   Less cash disbursements
   For inventory	$228,000
   For selling and admin expenses	$129,000
   For purchase of equipment	——
   For cash dividends	$45,000
   Total cash disbursements	$402,000
   Excess (deficiency) of cash	($50,000)
   Financing needed
   Cash balance, ending