Question

Requirements: Mr. Smith is preparing for a meeting with his banker to arrange the financing for the first quarter. Based on his sales forecast and the information he has provided (as detailed in the Situation below), your job as his new financial analyst is to prepare the following reports for the First Quarter of 2019: 1. Monthly Sales Budget 2. Monthly Production Budget 3. Monthly Direct Materials Budget 4. Monthly Schedule of Expected Cash Collection from Customers 5. Monthly Schedule of Expected Cash Payments for Direct Materials 6. Monthly Cash Budget 7. Monthly and Quarterly Budgeted Income Statements 8. Quarterly Budgeted Balance Sheet Situation: Iona Corporation makes standard-size 2-inch fasteners, which it sells for $155 per thousand. Mr. Smith is the majority owner and manages the inventory and finances of the company. He estimates sales for the following months in year 2019 to be: January ............... $263,500 (1,700,000 fasteners) February ............. $186,000 (1,200,000 fasteners) March ................. $217,000 (1,400,000 fasteners) April ................... $310,000 (2,000,000 fasteners) May .................... $387,500 (2,500,000 fasteners) In 2018, Iona Corporation’s budgeted sales were $175,000 in November and $232,500 in December (1,500,000 fasteners). Past history shows that Iona Corporation collects 50 percent of its accounts receivable in the normal 30-day credit period (the month after the sale) and the other 50 percent in 60 days (two months after the sale). It pays for its materials 30 days after receipt. In general, Mr. Smith likes to keep a two-month supply of inventory in anticipation of sales. Inventory at the beginning of December was 2,600,000 units. (This was not equal to his desired two-month supply.) Page 2 The major cost of production is the purchase of raw materials in the form of steel rods, which are cut, threaded, and finished. Last year raw material costs were $52 per 1,000 fasteners, but Mr. Smith has just been notified that material costs have risen, effective January 1, to $60 per 1,000 fasteners. The Iona Corporation uses FIFO inventory accounting. Labor costs are relatively constant at $20 per thousand fasteners, since workers are paid on a piecework basis. Overhead is allocated at $10 per thousand units, and selling and administrative expense is 20 percent of sales. Labor expense and overhead are direct cash outflows paid in the month incurred, while interest and taxes are paid quarterly. The corporation usually maintains a minimum cash balance of $25,000, and it puts its excess cash into marketable securities. The average tax rate is 40 percent, and Mr. Smith usually pays out 50 percent of net income in dividends to stockholders. Marketable securities are sold before funds are borrowed when a cash shortage is faced. Ignore the interest on any short-term borrowings. Interest on the long-term debt is paid in March, as are taxes and dividends. As of year-end, the Iona Corporation’s budgeted balance sheet was as follows: IONA CORPORATION Budgeted Balance Sheet December 31, 2018 Assets Current assets: Cash ........................................................... $ 30,000 Accounts receivable.................................... 320,000 Inventory .................................................... 237,800 Total current assets .................................. $ 587,800 Fixed assets: Plant and equipment ................................... 1,000,000 Less: Accumulated depreciation .............. 200,000 800,000 Total assets ................................................... $1,387,800 Liabilities and Stockholders’ Equity Accounts payable ......................................... $ 93,600 Long-term debt, 8 percent ............................. 400,000 Common stock ............................................. $ 504,200 Retained earnings ......................................... 390,000 894,200 Total liabilities and stockholders’ equity ....... $1,387,800

Answer 1

	Calculation of production requirement for J Corp
	Desired ending inventory	Sum of projected sales of following 2 months
	Beginning Inventory	ending inventory of a month becomes beginning of next month
	Production Requirements	Dec	Jan	Feb	Mar
	Projected Sales -Units	1500000	1700000	1200000	1400000
	Add:Desired ending inventory	2900000	2600000	3400000	4500000
		4400000	4300000	4600000	5900000
	Less beginning inventory	2600000	2900000	2600000	3400000
	Production Requirement	1800000	1400000	2000000	2500000
	Preparation of cash payment for J Corp
	Material	20% of expected sales of following month paid in the month after purchase
	Labor	20 per 1000 fastener
	OH Expenses	10 per 1000 fastener
	Selling and administrative expenses	20 % of sales paid in the month of sale
	Taxes	taxes paid quarterly
		Dec	Jan	Feb	Mar
	Units Produced	1800000	1400000	2000000	2500000
	Payments
	Material Payment -Previous Month
	payment for dec in Jan at
	$52 per 1000 units ,payments
	for jan .In Feb at $60 per 1000 units		93600	84000	120000
	Labour $20 per 1000 units		28000	40000	50000
	to be paid in the month
	Overhead expenses($10 per 1000 units)		14000	20000	25000
	Selling and Distribution Expenses		52700	37200	43400
	20% of sales paid in same
	Interest				8000
	Taxes -40% tax rate-from income statement				64560
	Dividend from income statement				48420
	Total Cash Payment		188300	181200	359380
	Preparation of cash receipts for J Corp
	Forecasted sales of 5 months and actual sales of Nov and Dec
	50% of sales collected after a month of sale
	remaining 50% collected after 2 months of sale
		Nov	Dec	Jan	Feb	Mar
	Credit Sales	175000	232500	263500	186000	217000
	Collections
	50% of prior months sales			116250	131750	93000
	50% of sales before 2 months			87500	116250	131750
	Total cash receipts			203750	248000	224750
	Cash Budget
		Jan	Feb	Mar
	Cash Receipt	203750	248000	224750
	Less cash payment	188300	181200	359380
	Net Cash Flow	15450	66800	-134630
	Add beginning cash balance	30000	25000	25000
	Cumulative cash balance	45450	91800	-109630
	Monthly Loan	0	0	47380	WN	109630-87250+25000		47380
	Cumulative Loan Balance	0	0	47380
	Marketable securities purchased	20450	66800
	Marketable securities sold			87250
	Cumulative Marketable securities	20450	87250	0
	ending cash balance	25000	25000	25000
	Income Statement	Jan	feb	Mar	Total
	Net Sales	263500	186000	217000	666500
	Less cost of goods Sold as per WN	139400	98400	126000	363800
	Gross Profits	124100	87600	91000	302700
	Less other operating expenses
	selling and distribution expenses	52700	37200	43400	133300
	interest expenses -8000 distributed among three months	2667	2667	2666	8000
	EBT	68733	47733	44934	161400
	less taxes @ 40%	27493.2	19093.2	17973.6	64560
	PAT	41239.8	28639.8	26960.4	96840
	less common stock
	50% of PAT				48420
	Addition to retain earnings PAT-common stock				48420
	Calculation of Cost of Goods Sold
		Cost per 1000 unit before 1st Jan	Cost per 1000 unit After 1st Jan
	Material	$52	$60
	Labor	$20	$20
	OH	$10	$10
	Total	$82	$90
	Ending inventory of Dec is 2900000 therefore for the sale of Jan ,Feb cost of Dec that is $82 and for mar sales increased cost of $90 per 1000 is taken as
	FIFO basis method of accounting
	Month	Units Sold	Cost per 1000 unit	Total
	Jan	1700000	82	139400
	Feb	1200000	82	98400
	Mar	1400000	90	126000
	Balance Sheet
	Assets	Amount	Liabilities and Equity	Amount
	Current Asset		Current Liabilities
	Cash	25000	Accounts Payable	150000
	Accounts Receivable	310000	Note Payable	47380
	Inventory	405000	Long term debt	400000
	Plant and Equipment -Net	800000	Stock holders equity
			Common Stock	504200
			Retained Earnings	438420
	Total Assets	1540000	Total Liabilities and equity	1540000
	Cash ending balance in March $25000
	Accounts Receivable	100% of March sales (50% to be received in april in May + 50% of Feb to be received in april
		$217000+$93000
		$310,000
	Retained Earnings	Old Retained earnings + Addition of Retained earnings
		$390000+$48240
		$438,240
	Inventory	Ending inventory of March in units at $90 per thousand units
		4500000 at 90 per thousand units
		4050000