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%u2019s general ledger showed the following account balances:

Cash $47,000 Accounts receivable $205,600 Inventory $58,800 Buildings and equipment, net $357,000 Accounts payable $87,225 Common stock $500,000 Retained earnings $81175

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

December $257,000

January $392,000,

February $589,000,

March $303,000

April $200,000.

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 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, $22,000 per month; advertising, $62,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $43,220 per quarter.

Each month ending inventory should equal 25% of the following month cost of goods sold.

One half of the month 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 $1,700 cash. During March, other equipment will be purchased for cash at a cost of $73,500.

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.

Schedule of expected cash collections

Schedule of Expected Cash Collections
	January	February	March	Quarter
Cash sales	$78,000			78,400
Credit sales	$205,000			205,600
Total Collections	$304,000	$0	$0	$284,000

Merchandise purchases budget:

Merchandise Purchases Budget
	January	February	March	Quarter
Budgeted Cost of Goods Sold	235,200*	$353,400
Add desired ending inventory	88,350**
Total needs	323,550	353,400	0	0
Less beginning inventory	58,800
Required purchases	264,750	353,400	$0	$0

*$392,000 sales x 60% cost ratio = $235,200 ** $353,400 x 25% = $88,350

Schedule of Expected Cash Disbursements-Merchandise Purchases
	January	February	March	Quarter
December purchases	87,225			$87,225
January purchases	132,375	$132,375		$264,750
February purchases
March purchases
Total disbursements	$219,600	$132,375	$0	$351,975

Complete the following cash budget:

Cash Budget
	January	February	March	Quarter
Cash balance, beginning	$47,000
Add cash collections	$284,000
Total cash available	$331,000	0	0	0
Less cash disbursements
For inventory	$219,000
For selling and admin expenses	$115,360
For purchase of equipment	------
For cash dividends	$45,000
Total cash disbursements	$379,960	0	0	0
Excess (deficiency) of cash	($48,960)	0	0	0
Financing:
Borrowing
Repayments
Interests
Total Financing	0		0	0
Cash balance, ending	($48,960)	$0	$0	$0