Question

“We really need to get this new material-handling equipment in operation just after the new year begins. I hope we can finance it largely with cash and marketable securities, but if necessary we can get a short-term loan down at MetroBank.” This statement by Beth Davies-Lowry, president of Intercoastal Electronics Company, concluded a meeting she had called with the firm’s top management. Intercoastal is a small, rapidly growing wholesaler of consumer electronic products. The firm’s main product lines are small kitchen appliances and power tools. Marcia Wilcox, Intercoastal’s General Manager of Marketing, has recently completed a sales forecast. She believes the company’s sales during the first quarter of 20x1 will increase by 10 percent each month over the previous month’s sales. Then Wilcox expects sales to remain constant for several months. Intercoastal’s projected balance sheet as of December 31, 20x0, is as follows:

Cash	$	35,000
Accounts receivable		252,000
Marketable securities		10,000
Inventory		231,000
Buildings and equipment (net of accumulated depreciation)		670,000
Total assets	$	1,198,000
Accounts payable	$	220,500
Bond interest payable		22,500
Property taxes payable		4,800
Bonds payable (15%; due in 20x6)		360,000
Common stock		400,000
Retained earnings		190,200
Total liabilities and stockholders’ equity	$	1,198,000

Jack Hanson, the assistant controller, is now preparing a monthly budget for the first quarter of 20x1. In the process, the following information has been accumulated:

1. Projected sales for December of 20x0 are $600,000. Credit sales typically are 60 percent of total sales. Intercoastal’s credit experience indicates that 30 percent of the credit sales are collected during the month of sale, and the remainder are collected during the following month.
2. Intercoastal’s cost of goods sold generally runs at 70 percent of sales. Inventory is purchased on account, and 50 percent of each month’s purchases are paid during the month of purchase. The remainder is paid during the following month. In order to have adequate stocks of inventory on hand, the firm attempts to have inventory at the end of each month equal to half of the next month’s projected cost of goods sold.
3. Hanson has estimated that Intercoastal’s other monthly expenses will be as follows:

Sales salaries	$	45,000
Advertising and promotion		25,000
Administrative salaries		45,000
Depreciation		15,000
Interest on bonds		4,500
Property taxes		1,200

In addition, sales commissions run at the rate of 2 percent of sales.

1. Intercoastal’s president, Davies-Lowry, has indicated that the firm should invest $115,000 in an automated inventory-handling system to control the movement of inventory in the firm’s warehouse just after the new year begins. These equipment purchases will be financed primarily from the firm’s cash and marketable securities. However, Davies-Lowry believes that Intercoastal needs to keep a minimum cash balance of $25,000. If necessary, the remainder of the equipment purchases will be financed using short-term credit from a local bank. The minimum period for such a loan is three months. Hanson believes short-term interest rates will be 10 percent per year at the time of the equipment purchases. If a loan is necessary, Davies-Lowry has decided it should be paid off by the end of the first quarter if possible.
2. Intercoastal’s board of directors has indicated an intention to declare and pay dividends of $50,000 on the last day of each quarter.
3. The interest on any short-term borrowing will be paid when the loan is repaid. Interest on Intercoastal’s bonds is paid semiannually on January 31 and July 31 for the preceding six-month period.
4. Property taxes are paid semiannually on February 28 and August 31 for the preceding six-month period.

Prepare Intercoastal Electronics Company’s master budget for the first quarter of 20x1 by completing the following schedules and statements:

1A) Sales budget:

1B) Cash receipts budget:

1C) Purchases budget:

1D) Cash disbursements budget:

1E) Complete the first three lines of the summary cash budget. Then do the analysis of short-term financing needs in requirement (6). Then finish requirement (5).

1F) Calculation of required short-term borrowing.

1G) Prepare Intercoastal Electronics’ budgeted income statement for the first quarter of 20x1. (Ignore income taxes.)

1H) Prepare Intercoastal Electronics’ budgeted statement of retained earnings for the first quarter of 20x1.

1I) Prepare Intercoastal Electronics’ budgeted balance sheet as of March 31, 20x1. (Hint: On March 31, 20x1, Bond Interest Payable is $9,000 and Property Taxes Payable is $1,200.)

Answer 1

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Sales Budget	December	January	February	March	Total	April	Note
Budgeted Sales Revenue	600,000.00	660,000.00	726,000.00	798,600.00	2,184,600.00	798,600.00	A= 110% of previous month sales
Cash sale is 40%	240,000.00	264,000.00	290,400.00	319,440.00	873,840.00		B=A*40%
Credit sale is 60%	360,000.00	396,000.00	435,600.00	479,160.00	1,310,760.00		C=A*60%
	252,000.00
Collection Budget		January	February	March	Total
Cash sale		264,000.00	290,400.00	319,440.00	873,840.00		B
Credit sale 30%		118,800.00	130,680.00	143,748.00	393,228.00		D= 30% of C of previous month
Credit sale 70%		252,000.00	277,200.00	304,920.00	834,120.00		E= 70% of C of previous month, For January take from Balance Sheet.
Total Scheduled Collections		634,800.00	698,280.00	768,108.00	2,101,188.00		F=E+B+D
Cost of Goods Sold	December	January	February	March	Total	April
Budgeted Cost of Goods Sold - 70% of sales	420,000.00	462,000.00	508,200.00	559,020.00	1,529,220.00	559,020.00	G=A*70%
Closing stock @ 50%	231,000.00	254,100.00	279,510.00	279,510.00			H=F*50%
Opening Stock		231,000.00	254,100.00	279,510.00			I=H of previous month, For January take from Balance Sheet.
Required Purchases		485,100.00	533,610.00	559,020.00	1,577,730.00		J=G+H-I
Cash Payment for Inventory		January	February	March	Total
Required Purchases		485,100.00	533,610.00	559,020.00	1,577,730.00		J
Payment of current month- 50%		242,550.00	266,805.00	279,510.00	788,865.00		K=J*50%
Payment of prior month- 50%		220,500.00	242,550.00	266,805.00	729,855.00		L= 50% of J of previous month, For January take from Balance Sheet.
Cash Payment for Inventory		463,050.00	509,355.00	546,315.00	1,518,720.00
Cash Disbursement budget
Cash Payment for Inventory		463,050.00	509,355.00	546,315.00	1,518,720.00
Sales Salaries		45,000.00	45,000.00	45,000.00	135,000.00
Advertising & Promotion		25,000.00	25,000.00	25,000.00	75,000.00
Administrative Salaries		45,000.00	45,000.00	45,000.00	135,000.00
Interest on Bonds		27,000.00	-	-	27,000.00		Payable for 6 months. (4500*6)
Property taxes		-	7,200.00	-	7,200.00		Payable for 6 months. (1200*6)
Dividends		-	-	50,000.00	50,000.00
Cash Disbursement budget		605,050.00	631,555.00	711,315.00	1,947,920.00

Cash budget		January	February	March	Total
Beginning Cash Balance		35,000.00	25,000.00	91,725.00
Plus: Collections		634,800.00	698,280.00	768,108.00	2,101,188.00
Sales of securities		10,000.00	-	-
Cash Available		679,800.00	723,280.00	859,833.00	2,262,913.00
Disbursements					-
Cash Disbursements		605,050.00	631,555.00	711,315.00	1,947,920.00
Total cash payments		605,050.00	631,555.00	711,315.00	1,947,920.00
Preliminary cash balance		74,750.00	91,725.00	148,518.00
Short Term Loan		65,250.00	-	(65,250.00)
Interest Paid on short Term Loan		-	-	1,631.25
Equipment purchased		115,000.00	-	-
Closing Cash Balance		25,000.00	91,725.00	81,636.75

Calculation of required short-term borrowing:
Preliminary cash balance at the end of Jan	74,750.00	M
Equipment to be purchased	115,000.00	N
Minimum Cash Balance to maintain	25,000.00	O
Loan Required	65,250.00	P=N+O-M
Interest Rate	10%	Q
Interest for 3 months	1,631.25	R=P*Q%*3/12
Income Statement	Amount ($)
Sales revenue	2,184,600.00
Cost of goods sold	1,529,220.00
Gross margin	655,380.00
Sales salaries	135,000.00
Advertising and promotion	75,000.00
Administrative salaries	135,000.00
Depreciation	45,000.00
Property taxes	3,600.00
Operating income	261,780.00
Interest on bonds	13,500.00
Interest Paid on short Term Loan	1,631.25	R
Net income	246,648.75
Net income	246,648.75	S
Opening Retained earnings	190,200.00	T
Dividend Paid	50,000.00	U
Closing Retained earnings	386,848.75	V=S+T-U
Balance Sheet	Amount ($)
Assets
Cash	81,636.75	Closing cash Balance from Cash Budget
Accounts receivable	335,412.00	70% of Credit Sale figure of December
Inventory	279,510.00	Closing Stock figure of December
Equipment	740,000.00	670000+115000-45000
Total assets	1,436,558.75
Liabilities
Accounts payable	279,510.00	50% of Purchases of December month.
Bond interest payable	9,000.00
Property taxes payable	1,200.00
Bonds payable (15%; due in 20x6)	360,000.00
Total liabilities	649,710.00
Equity		See Workings
Common stock	400,000.00
Retained earnings	386,848.75	U
Total equity	786,848.75
Total liabilities and equity	1,436,558.75