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 ............................................................................................................................ 270,000 Marketable securities .......................................................................................................................... 15,000 Inventory ............................................................................................................................................ 154,000 Buildings and equipment (net of accumulated depreciation) ................................................................... 626,000 Total assets ........................................................................................................................................$1,100,000 Accounts payable ................................................................................................................................ $ 176,400 Bond interest payable .......................................................................................................................... 12,500 Property taxes payable ........................................................................................................................ 3,600 Bonds payable (10%; due in 20x6) ....................................................................................................... 300,000 Common stock ................................................................................................................................... 500,000 Retained earnings ............................................................................................................................... 107,500 Total liabilities and stockholders’ equity ................................................................................................$1,100,000 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 $400,000. Credit sales typically are 75 percent of total sales. Intercoastal’s credit experience indicates that 10 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 40 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 .............................................................................................................................................. $21,000 Advertising and promotion ............................................................................................................................ 16,000 Administrative salaries ................................................................................................................................. 21,000 Depreciation ................................................................................................................................................ 25,000 Interest on bonds ......................................................................................................................................... 2,500 Property taxes .............................................................................................................................................. 900 In addition, sales commissions run at the rate of 1 percent of sales.

4 . Intercoastal’s president, Davies-Lowry, has indicated that the firm should invest $125,000 in an automated inventory-handling system to control the movement of inventory in the firm’s ware-house 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 pur-chases 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 $50,000 on the last day of each quarter.

6 . The interest on any short-term borrowing will be paid when the loan is repaid. Interest on Inter-coastal’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: 1 . Describe the role of budgeting in a firm’s strategic planning.

2 . For each of the financial objectives established by the board of directors and the president of Healthful Foods Inc., determine whether John Winslow’s budget attains these objectives. Support your conclusion in each case by presenting appropriate calculations, and use the following format for your answer. Objective Attained/Not AttainedCalculations 3 . Explain why the adjustments contemplated by John Winslow are unethical, citing specific standards of ethical conduct for management accountants. (CMA, adapted) “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 ............................................................................................................................ 270,000

Marketable securities .......................................................................................................................... 15,000

Inventory ............................................................................................................................................ 154,000

Buildings and equipment (net of accumulated depreciation) ................................................................... 626,000

Total assets ........................................................................................................................................$1,100,000

Accounts payable ................................................................................................................................ $ 176,400

Bond interest payable .......................................................................................................................... 12,500

Property taxes payable ........................................................................................................................ 3,600

Bonds payable (10%; due in 20x6) ....................................................................................................... 300,000

Common stock ................................................................................................................................... 500,000

Retained earnings ............................................................................................................................... 107,500

Total liabilities and stockholders’ equity ................................................................................................$1,100,000

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 $400,000. Credit sales typically are 75 percent of total sales. Intercoastal’s credit experience indicates that 10 percent of the credit sales are collected dur-ing 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 40 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 .............................................................................................................................................. $21,000

Advertising and promotion ............................................................................................................................ 16,000

Administrative salaries ................................................................................................................................. 21,000

Depreciation ................................................................................................................................................ 25,000

Interest on bonds ......................................................................................................................................... 2,500

Property taxes .............................................................................................................................................. 900

In addition, sales commissions run at the rate of 1 percent of sales. Prepare Intercoastal Electronics Company’s master budget for the first quarter of 20x1 by completing the following schedules and statements.

1 . Sales budget: 20x0 20x1 December January February March 1st Quarter

Total sales .................................................

Cash sales .................................................

Sales on account .......................................

2 . Cash receipts budget: 20x1 January February March 1st Quarter

Cash sales ................................................................

Cash collections from credit sales made during current month ...................................

Cash collections from credit sales made during preceding month ...............................

Total cash receipts ....................................................

3 . Purchases budget: 20x0 20x1 December January February March 1st Quarter

Budgeted cost of goods sold .....................................

Add: Desired ending inventory ............................

Total goods needed ............................

Less: Expected beginning inventory .......................

.Purchases .........................................

4 . Cash disbursements budget: 20x1 January February March 1st Quarter

Inventory purchases:

Cash payments for purchases during the current month* .................................

Cash payments for purchases ................................

during the preceding month† .............................

Total cash payments for inventory purchases ..........................................

Other expenses: Sales salaries .......................................................

Advertising and promotion .....................................

Administrative salaries ..........................................

Interest on bonds‡ .................................................

Property taxes‡ .....................................................

Sales commissions ...............................................

Total cash payments for other expenses .................................................

Total cash disbursements ..........................................

*40% of the current month’s purchases (schedule 3).†60% of the prior month’s purchases (schedule 3).‡Bond interest is paid every six months, on January 31 and July 31. Property taxes also are paid every six months, on February 28 and August 31.

5 . 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). Summary cash budget:

6. Analysis of short-term financing needs:

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

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

9 . Prepare Intercoastal Electronics’ budgeted balance sheet as of March 31, 20x1. ( Hint: On March 31, 20x1, Bond Interest Payable is $5,000 and Property Taxes Payable is $900.)

Answer 1