PROBLEM 831 Completing a Master Budget LO82, LO84, LO87, LO88, LO89, LO810 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 companys general ledger showed the following account balances:

72,000 feet

? feet

Cash ..............................................

Accounts receivable ..............................

Inventory ..........................................

Buildings and equipment (net) ....................

Accounts payable .................................

Common stock ....................................

Retained earnings .................................

Debits

$ 48,000

224,000

60,000

370,000

$702,000

Credits

$ 93,000

500,000

109,000

$702,000

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

December (actual) ..............

January .........................

February ........................

March ...........................

April .............................

$280,000

$400,000

$600,000

$300,000

$200,000

c. 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.

d. The companys gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

e. 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.

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

g. One-half of a months inventory purchases is paid for in the month of purchase; the other half is paid in the following month.

h. 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.

i. During January, the company will declare and pay $45,000 in cash dividends.

j. 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:

Cash sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Credit sales ..............................

Total cash collections ....................

Add desired ending inventory ..........

Total needs ..............................

Less beginning inventory ...............

December purchases ............................

January purchases ...............................

February purchases ..............................

March purchases .................................

January

$ 80,000

224,000

90,000

Master Budgeting 385

b. Schedule of expected cash disbursements for merchandise purchases:

$304,000

330,000

60,000

February

March

Quarter

Budgeted cost of goods sold ...........

January

$240,000*

February

$360,000

March

Quarter

Required purchases .....................

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

$270,000

January

$ 93,000

135,000

February

135,000

March

Quarter

$ 93,000

270,000

Total cash disbursements for purchases . . . . . . . . .

$228,000

386

Chapter 8

3.

Cash budget:

CASES

Beginning cash balance ............

Add cash collections ................

Total cash available .................

Less cash disbursements:

January

$ 48,000

304,000

February

March

Quarter

352,000

Inventory purchases ..............

Selling and administrative expenses .......................

Equipment purchases ............

Cash dividends ...................

Total cash disbursements ...........

Excess (deficiency) of cash ..........

Financing:

Etc.

228,000

129,000

45,000

402,000

(50,000)

4. 5.

Using Schedule 9 as your guide, prepare

Truatwith