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 companys general ledger showed the following account balances:

Cash	$	48,000
Accounts receivable		224,000
Inventory		60,000
Buildings and equipment (net)		370,000
Accounts payable			$	93,000
Common stock				500,000
Retained earnings				109,000
	$	702,000	$	702,000

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

December(actual)	$	280,000
January	$	400,000
February	$	600,000
March	$	300,000
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 companys 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 for the quarter.

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

7. One-half of a months 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.

Complete the merchandise purchases budget.

Merchandise Purchases Budget
	January	February	March	Quarter
Budgeted cost of goods sold	$240,000	$360,000	180000	780000
Add desired ending inventory	90,000	45000	30000
Total needs	330,000	405000
Less beginning inventory	60,000	90000
Required purchases	270000	315000
*$400,000 sales 60% cost ratio = $240,000.
$360,000 25% = $90,000.

Complete the schedule of expected cash disbursements for merchandise purchases.

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

Complete the cash budget. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Hillyard Company
Cash Budget
	January	February	March	Quarter
Beginning cash balance	$48,000
Add collections from customers	304,000
Total cash available	352,000
Less cash disbursements:
Inventory purchases	228,000
Selling and administrative expenses	129,000
Equipment purchases
Cash dividends	45,000
Total cash disbursements	402,000
Excess (deficiency) of	(50,000)
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash balance	$(50,000)

Prepare an absorption costing income statement for the quarter ending March 31.

Hillyard Company
Income Statement
For the Quarter Ended March 31
Sales		$1,300,000
Cost of goods sold:
Beginning inventory	60,000
Purchases	750,000
	810,000
Ending inventory	30,000	780,000
Gross margin		520,000
Selling and administrative expenses:
Salaries and wages	81,000
Advertising	210,000
Shipping	65,000
Other expenses	39,000
Depreciation	42,000
		439,400
Net operating income		80,600
Net income		$80,600

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