Study 4

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:

Current assets as of March 31:
Cash	$	8,000
Accounts receivable	$	20,000
Inventory	$	36,000
Building and equipment, net	$	120,000
Accounts payable	$	21,750
Capital stock	$	150,000
Retained earnings	$	12,250

The gross margin is 25% of sales.

Actual and budgeted sales data:

March (actual)	$	50,000
April	$	60,000
May	$	72,000
June	$	90,000
July	$	48,000

Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.

Each months ending inventory should equal 80% of the following months budgeted cost of goods sold.

One-half of a months inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.

Monthly expenses are as follows: commissions, 12% of sales; rent, $2,500 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $900 per month (includes depreciation on new assets).

Equipment costing $1,500 will be purchased for cash in April.

Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. 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, up to a total loan balance of $20,000. 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:

1. Complete the following schedule.

Schedule of Expected Cash Collections
	April	May	June	Quarter
Cash sales	$36,000
Credit sales	20,000
Total collections	$56,000

2. Complete the following:

Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted cost of goods sold	$45,000
Add desired ending inventory	43,200
Total needs	88,200
Less beginning inventory	36,000
Required purchases	$52,200

Schedule of Expected Cash DisbursementsMerchandise Purchases
	April	May	June	Quarter
March purchases	$21,750			$21,750
April purchases	26,100	26,100		52,200
May purchases
June purchases
Total disbursements

3. Complete the following cash budget: (Borrow and repay in increments of $1,000. Cash deficiency, repayments and interest should be indicated by a minus sign.)

Shilow Company
Cash Budget
	April	May	June	Quarter
Beginning cash balance	$8,000
Add cash collections	56,000
Total cash available	64,000
Less cash disbursements:
For inventory	47,850
For expenses	13,300
For equipment	1,500
Total cash disbursements	62,650
Excess (deficiency) of cash	1,350
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash balance

4. Prepare an absorption costing income statement for the quarter ended June 30.

Shilow Company
Income Statement
For the Quarter Ended June 30
Cost of goods sold:
Selling and administrative expenses:

5. Prepare a balance sheet as of June 30.

Shilow Company
Balance Sheet
June 30
Assets
Current assets:
Total current assets
Total assets
Liabilities and Stockholders Equity
Stockholders' equity:
Total liabilities and stockholders equity