Completing a Master Budget
Hill yard 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 company's general ledger showed thefollowing account balances:
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 48,000
Accounts receivable . . . . . . . . . . . . 224,000
Inventory . . . . . . . . . . . . . . . . . . . . . 60,000
Buildings and equipment (net) . . . . . 370,000
Accounts payable . . . . . . . . . . . . . . $ 93,000
Capital stock . . . . . . . . . . . . . . . . . . 500,000
Retained earnings . . . . . . . . . . . . . . 109,000
$702,000 $702,000
b. 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
c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the monthfollowing sale. The accounts receivable at December 31 are a result of December credit sales.
d. The company's 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, includingdepreciation on new assets acquired during the quarter, will be $42,000 for the quarter.
f. Each month's ending inventory should equal 25% of the following month's cost of goods sold.
g. One-half of a month's inventory purchases is paid for in the month of purchase; the other halfis paid in the following month.
h. During February, the company will purchase a new copy machine for $1,700 cash. DuringMarch, 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 anagreement with a local bank that allows the company to borrow in increments of $1,000 at thebeginning of each month. The interest rate on these loans is 1% per month and for simplicitywe will assume that interest is not compounded. The company would, as far as it is able, repaythe 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:
January February March Quarter
Cash sales . . . . . . . . . . . . . . . . . . . $ 80,000
Credit sales . . . . . . . . . . . . . . . . . . 224,000
Total cash collections . . . . . . . . . . . $304,000
2. a. Merchandise purchases budget:
January February March Quarter
Budgeted cost of goods sold . . . . . $240,000* $360,000
Add desired ending inventory. . . . . 90,000†
Total needs . . . . . . . . . . . . . . . . . . . 330,000
Less beginning inventory . . . . . . . . 60,000
Required purchases . . . . . . . . . . . . $270,000
*$400,000 sales 60% cost ratio
$240,000.
†$360,000 25%
$90,000.
b. Schedule of expected cash disbursements for merchandise purchases:
January February March Quarter
December purchases . . . . . . . . . . . $ 93,000 $ 93,000
January purchases . . . . . . . . . . . . . 135,000 135,000 270,000
February purchases . . . . . . . . . . . . -
March purchases . . . . . . . . . . . . . . -
Total cash disbursements
for purchases . . . . . . . . . . . . . . . $228,000
3. Schedule of expected cash disbursements for selling and administrative expenses:
January February March Quarter
Salaries and wages . . . . . . . . . . . . . . . . . $ 27,000
Advertising . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Other expenses . . . . . . . . . . . . . . . . . . . . 12,000
Total cash disbursements for
selling and administrative expenses . . . $129,000
4. Cash budget:
January February March Quarter
Cash balance, beginning . . . . . . . . $ 48,000
Add cash collections . . . . . . . . . . . 304,000
Total cash available . . . . . . . . . . . . 352,000
Less cash disbursements:
Purchases of inventory . . . . . . . 228,000
Selling and administrative
expenses . . . . . . . . . . . . . . . . 129,000
Purchases of equipment . . . . . . -
Cash dividends . . . . . . . . . . . . . . 45,000
Total cash disbursements . . . . . . . 402,000
Excess (deficiency) of cash . . . . . . (50,000)
Financing:
Etc.
5. Prepare an absorption costing income statement for the quarter ending March 31 as shown in Schedule 9 in the chapter.
6. Prepare a balance sheet as of March 31.