Problem 8-31 (Algo) Completing a Master Budget [LO8-2, LO8-4, LO8-7, LO8-8, LO8-9, LO8-10]

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 companys general ledger showed the following account balances:

	Debits	Credits
Cash	$ 60,000
Accounts receivable	216,000
Inventory	60,750
Buildings and equipment (net)	370,000
Accounts payable		$ 91,125
Common stock		500,000
Retained earnings		115,625
	$ 706,750	$ 706,750

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

December(actual)	$ 270,000
January	$ 405,000
February	$ 602,000
March	$ 317,000
April	$ 213,000

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 companys 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, $35,000 per month: advertising, $61,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,300 for the quarter.

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

One-half of a months 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 $3,000 cash. During March, other equipment will be purchased for cash at a cost of $80,000.

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.

Complete the Schedule of expected cash collections:

Schedule of Expected Cash Collections
	January	February	March	Quarter
Cash sales	$81,000
Credit sales	216,000
Total collections	$297,000

Complete the merchandise purchases budget:

Merchandise Purchases Budget
	January	February	March	Quarter
Budgeted cost of goods sold	$243,000*	$361,200
Add desired ending inventory	90,300
Total needs	333,300
Less beginning inventory	60,750
Required purchases
*$405,000 sales 60% cost ratio = $243,000.
$361,200 25% = $90,300.

Complete the schedule of expected cash disbursements for merchandise purchases.

Schedule of Expected Cash Disbursements for Merchandise Purchases
	January	February	March	Quarter
December purchases	$91,125
January purchases	136,275	136,275
February purchases
March purchases
Total cash disbursements for purchases

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	$60,000
Add collections from customers	297,000
Total cash available
Less cash disbursements:
Inventory purchases	227,400
Selling and administrative expenses	128,400
Equipment purchases
Cash dividends	45,000
Total cash disbursements	400,800
Excess (deficiency) of cash
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash balance