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:

1. Projected sales for December of 20x0 are $500,000. Credit sales typically are 70 percent of total sales. Intercoastal's credit experience indicates that 20 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 Advertising and promotion Administrative salarien Depreciation Interest on bonds Property taxes $ 30,000 16,000 30.000 20,000 1.500 1,200 In addition, sales commissions run at the rate of 3 percent of sales.

4. Intercoastal's president, Davies-Lowry, has indicated that the firm should invest $100,000 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 $15.000. 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. 5. Intercoastal's board of directors has indicated an intention to declare and pay dividends of $75,000 on the last day of each quarter. 6. The interest on any short-term borrowing will be paid when the loan is repald. Interest on Intercoastal's bonds is paid semiannually on January 31 and July 31 for the preceding six-month period 7. Property taxes are paid semiannually on February 28 and August 31 for the preceding six-month period. Required: Prepare Intercoastal Electronics Company's master budget for the first quarter of 20x1 by completing the following schedules and statements

Answer 1

(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.