In: Accounting
“We really need to get this new material-handling equipment in
operation just after the new year...
“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 |
$ |
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.
2. Cash receipts budget: