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: Canh Accounts receivable Marketable securities Inventory Buildings and equipment (net of accumulated depreciation) Total assets Necounts payable Bond interest payable Property taxes payable Bonds payable (120) duen 2016) Common stook. Retained earnings Total isabilities and stockholdoran equity 45,000 280,000 25.000 192,500 548,000 $1,090,500 $ 183,750 7.500 4.800 150.000 500,000 $1,090,500 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:

Answer 1

Solution

(1)

Sales Budget
	20X0	20X1
	December	January	February	March	First Quarter
Total Sales	$ 5,00,000.00	$ 5,50,000.00	$ 6,05,000.00	$ 6,65,500.00	$ 18,20,500.00
Cash Sales	$ 1,50,000.00	$ 1,65,000.00	$ 1,81,500.00	$ 1,99,650.00	$    5,46,150.00
Sales on account	$ 3,50,000.00	$ 3,85,000.00	$ 4,23,500.00	$ 4,65,850.00	$ 12,74,350.00

Notes:
1. Total sales for the period January - March has been calculated as 1.1 times of the previous month sales as it was expected to grow 10% more than the previous month in the current month.
2. Credit Sales are 70% of Total Sales. Therefore, Cash Sales should be 30% of Total Sales, and accordingly the calculations are drawn above.

(2)  

Cash Receipts Budget
	20X1
	January	February	March	First Quarter
Cash Sales	$ 1,65,000.00	$ 1,81,500.00	$ 1,99,650.00	$    5,46,150.00
Cash Collection from credit sales made during current month	$     77,000.00	$     84,700.00	$     93,170.00	$    2,54,870.00
Cash Collection from credit sales made during preceeding month	$ 2,80,000.00	$ 3,08,000.00	$ 3,38,800.00	$    9,26,800.00
Total Cash Receipts	$ 5,22,000.00	$ 5,74,200.00	$ 6,31,620.00	$ 17,27,820.00

Note:
1. The company follows a rule to recover 20% of Sales on account in the month of sale (i.e. Credit Sales made during current month), and balance 80% in the next month (i.e. Credit Sales made during preceeding month). The calculations are drawn accordingly as per given rules.

(3)

Purchases Budget
	20X0	20X1
	December	January	February	March	First Quarter
Budgeted Cost of Goods Sold	$ 3,50,000.00	$ 3,85,000.00	$ 4,23,500.00	$ 4,65,850.00	$ 16,24,350.00
Add: Desired Ending Inventory	$ 1,92,500.00	$ 2,11,750.00	$ 2,32,925.00	$ 2,32,925.00	$    8,70,100.00
Total goods needed	$ 5,42,500.00	$ 5,96,750.00	$ 6,56,425.00	$ 6,98,775.00	$ 24,94,450.00
Less: Expected beginning inventory	$                    -	$ 1,92,500.00	$ 2,11,750.00	$ 2,32,925.00	$    6,37,175.00
Purchases	$ 5,42,500.00	$ 4,04,250.00	$ 4,44,675.00	$ 4,65,850.00	$ 18,57,275.00

Notes:
1. Budgeted Cost of Goods Sold will be 70% of Total Sales.
2. Desired Ending Inventory has been taken as 50% of the next month Budgeted Cost of Goods Sold.
3. It was given that the company has assumed sales will be constant after March. Hence, Sales of April will be $ 465,850 again. Therefore Cost of Goods Sold for March, 20X1 shall be 70% of $ 465,850, or $ 232,925.
4. As no information was given, it is assumed that Expected beginning inventory for December 20X0 will be NIL.