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    Hillyard Company: Solution of Master Budget Problem

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    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 company's general ledger showed the following account balances:
    2 Cash $48,000 (debit)
    3 Accounts receivable $224,000 (debit)
    4 Inventory $60,000 (debit)
    5 Buildings and equipment, net $370,000 (debit)
    6 Accounts payable $93,000 (credit)
    7 Capital stock $500,000 (credit)
    8 Retained earnings $109,000 (credit)
    9 Actual sales for December and budgeted sales for the next four months are as follows: December $280,000, January $400,000, February $600,000, March $300,000 and April $200,000.
    10 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.
    11 The company's gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)
    12 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 per quarter.
    13 Each month's ending inventory should equal 25% of the following month's cost of goods sold.
    14 One half of the month's inventory purchases is paid for in the month of purchase; the other half is paid in the following month.
    15 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.
    16 During January, the company will declare and pay $45,000 in cash dividends.
    17 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.

    Using the data above, complete the following statements and schedules for the first quarter:

    a Schedule of Expected Cash Collections:
    January February March Quarter
    Cash sales $80,000
    Credit sales $224,000
    Total Collections $304,000

    b Merchandise purchases budget:

    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 x 60% cost ratio = $240,000
    ** $360,000 x 25% = $90,000

    c Schedule of Expected Cash Disbursements-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 disbursements $228,000

    d Complete the following schedule:

    Schedule of Expected Cash Disbursements-Selling and Administrative Expenses
    January February March Quarter
    Salaries and wages $27,000
    Advertising $70,000
    Shipping $20,000
    Other expenses $12,000
    Total disbursements $129,000

    e Complete the following cash budget:

    Cash Budget
    January February March Quarter
    Cash balance, beginning $48,000
    Add cash collections $304,000
    Total cash available $352,000
    Less cash disbursements
    For inventory $228,000
    For selling and admin expenses $129,000
    For purchase of equipment ------
    For cash dividends $45,000
    Total cash disbursements $402,000
    Excess (deficiency) of cash ($50,000)
    Financing needed
    Cash balance, ending

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    Please see the attached Excel spreadsheet which contains solutions for the following budgets and ...

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