Question

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 $ 40,000 Accounts receivable 315,000 Marketable securities 25,000 Inventory 192,500 Buildings and equipment (net of accumulated depreciation) 549,000 Total assets $ 1,121,500 Accounts payable $ 220,500 Bond interest payable 6,250 Property taxes payable 6,000 Bonds payable (10%; due in 20x6) 150,000 Common stock 500,000 Retained earnings 238,750 Total liabilities and stockholders’ equity $ 1,121,500 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: Projected sales for December of 20x0 are $500,000. Credit sales typically are 70 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. 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. Hanson has estimated that Intercoastal’s other monthly expenses will be as follows: Sales salaries $ 35,000 Advertising and promotion 16,000 Administrative salaries 35,000 Depreciation 25,000 Interest on bonds 1,250 Property taxes 1,500 In addition, sales commissions run at the rate of 2 percent of sales. Intercoastal’s president, Davies-Lowry, has indicated that the firm should invest $105,000 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 $40,000. 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. Intercoastal’s board of directors has indicated an intention to declare and pay dividends of $50,000 on the last day of each quarter. 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. 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. 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.

Answer 1

The statement showing cash budget for the first quarter:

Particulars Jan Feb Mar

Opening cash balance 40000 40000 76600

cash sales 165000 181500 199650

collection from debtors (Working note.1)    353500 388850 427735

Sale of Marketable securities 25000   

Short term borrowing 40000

TOTAL (A) 623500 610350 703985

Purchases (working note.2)    364000 400400 440460

Sales salaries 35000 35000 35000

Advertising and promotion 16000 16000 16000

Adminisrtative salaries 35000 35000 35000

Depreciation 25000 25000 25000

Interest on bonds 1250

Property taxes 1500

Dividend 50000

Repayment of short term borrowing   40000

Interest on borrowing 1000

Sales commission @2%on sales 11000 12100 13310

Purchase of equipment 105000

TOTAL (B) 592250 525000 655750

Balance A-B 31250 85350 48235

Borrowing 8750 ( 8750) -

Closing cash balance 40000 76600 48235

Working Note 1:

Caluculation of collection from debtors

Particulars Dec Jan Feb March

Projected sales 500000 550000 605000 665500

Credit sales@70% of projected sales 350000 385000 423500 465850

Cash sales@30% of projected sales 150000 165000 181500 199650

Credit sales collection @ 10% in the month (A) 35000 38500 42350 46585

Credit sales collection @ 90% in the following month(B) - 315000    346500 381150

Total (A+B)     353500    388850 427735

Working Note 2:

Calculation of purchases   

Particulars Dec Jan Feb March

Cost of goods sold@70% of the sales 350000 385000 423500 465850

Purchases@40%   154000 169400 186360

Balance     210000 231000 254100

Total 364000 400400 440460