Chapter 9, Problem 44P

“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:

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. 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. 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. 3. Hanson has estimated that Intercoastal’s other monthly expenses will be as follows:

   In addition, sales commissions run at the rate of 1 percent of sales.

4. 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 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 $25,000. 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. 5. Intercoastal’s board of directors has indicated an intention to declare and pay dividends of $50,000on the last day of each quarter.
6. 6. 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.
7. 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.

1. 1. Sales budget:

1. 2. Cash receipts budget:

1. 3. Purchases budget:

1. 4. Cash disbursements budget:

1. 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:

1. 6. Analysis of short-term financing needs:

1. 7. Prepare Intercoastal Electronics’ budgeted income statement for the first quarter of 20x1. (Ignore income taxes.)
2. 8. Prepare Intercoastal Electronics’ budgeted statement of retained earnings for the first quarter of 20x1.
3. 9. Prepare Intercoastal Electronics’ budgeted balance sheet as of March 31, 20x1. (Hint: On March31, 20x1, Bond Interest Payable is $5,000 and Property Taxes Payable is $900.)

To determine

Prepare a sales budget.

Explanation of Solution

Sales budget: This budget is prepared by the organization for the yearly or monthly basis as per need. It includes all the estimated revenues from the entire operating source.

Sales budget is prepared to estimate or project the sales in dollars and units for a particular period of time.

Prepare a sales budget:

Table (1)

To determine

Prepare a cash receipts budget.

Explanation of Solution

Cash receipts Budget: The cash budget is a part of the financial statements which is a plan for the cash receipts for a particular accounting period. This budget gives an estimation of all the cash inflows of a business for the given financial period.

Prepare a cash receipts budget:

Table (2)

Working note 1:

20x1:

Calculate the cash collection from credit sales made during current month:

January:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ \text{made during January}\end{array}\}\text{= 10\% of January credit sales}\\ \text{=\$330,000}\times 1\text{0\%}\\ =\$33,000\end{array}$

February:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ \text{made during February}\end{array}\}\text{= 10\% of February}\text{credit sales}\\ \text{=\$363,000}\times 1\text{0\%}\\ =\$36,300\end{array}$

March:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ \text{made during March}\end{array}\}\text{= 10\% of March}\text{credit sales}\\ \text{=\$399,300}\times 1\text{0\%}\\ =\$39,930\end{array}$

Working note 2:

20x1:

Calculate the cash collection from credit sales made during previous sales:

January:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ \text{made during January}\end{array}\}\text{= 90\% of previous month credit sales}\left(\text{December}\right)\\ \text{=\$300,000}\times 9\text{0\%}\\ =\$270,000\end{array}$

February:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ \text{made during February}\end{array}\}\text{= 90\% of previous month credit sales}\left(\text{January}\right)\\ \text{=\$330,000}\times 9\text{0\%}\\ =\$297,000\end{array}$

March:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ \text{made during March}\end{array}\}\text{= 90\% of previous month credit sales}\left(\text{February}\right)\\ \text{=\$363,000}\times 9\text{0\%}\\ =\$326,700\end{array}$

To determine

Prepare a purchases budget.

Explanation of Solution

Prepare a purchases budget:

Table (3)

Working note 1:

Calculate the expected beginning inventory for December:

$\begin{array}{c}\begin{array}{l}\text{Expected beginning }\\ \text{inventory for December}\end{array}\}\text{= }\left(\begin{array}{l}\text{Cost of goods sold }\\ \text{for December }\times \text{50\%}\end{array}\right)\\ \text{=}\left(\text{\$}280,000\times \text{50\%}\right)\\ =\$140,000\end{array}$

To determine

Prepare a cash disbursement budget.

Explanation of Solution

Cash payments for purchases: This Schedule is prepared for the estimation of the cash payment for purchase for the period. This includes all probable cash payment.

Budgeted cash disbursement: Budgeted cash disbursements are the cash outflows expected for a budgeted period.

Prepare a cash disbursement budget:

Table (4)

Working note 1:

Calculate the amount of interest on bonds:

$\begin{array}{c}\text{Interest on bonds = }\left(\begin{array}{l}\text{Bonds payable amount}\times \\ \text{Interest rate}\times \\ \text{Payment of interest is 6 months}\end{array}\right)\\ \text{=}\left(\text{\$300,000}\times 10\%\times \frac{\text{6 months}}{12\text{months}}\right)\\ =\$15,000\end{array}$

To determine

Prepare a cash budget.

Explanation of Solution

Cash Budget: Cash budget shows the expected cash inflows and cash outflows for a budgeted period.

Prepare a cash budget:

Table (5)

To determine

Analyze the short-term financing needs.

Explanation of Solution

Analyze the short-term financing needs:

Particulars	Amount ($)
Projected cash balance as of December 31, 20x0	35,000
Less: Minimum cash balance	25,000
Cash available for equipment purchases	10,000
Projected proceeds from sale of marketable securities	15,000
Cash available	25,000
Less: Cost of investment in equipment	125,000
Required short-term borrowing	$(100,000)

Table (6)

To determine

Prepare I Electronics budgeted income statement for the first quarter of 20x1.

Explanation of Solution

Budgeted Income Statement: The statement that indicates the expected profitability of operations for the budget period is known as the budgeted income statement. It also provides the basis for evaluating the performance of a company, and act as a call to action.

Prepare I Electronics budgeted income statement for the first quarter of 20x1:

I Electronics
Budgeted Income Statement
For the First Quarter of, 20x1
Particulars	Amount ($)	Amount ($)
Sales revenue		1,456,400
Less: Cost of goods sold		1,019,480
Gross margin		436,920
Selling and administrative expenses:
Sales salaries	63,000
Sales commissions	14,564
Advertising and promotion	48,000
Administrative salaries	63,000
Depreciation	75,000
Interest on bonds	7,500
Interest on short-term bank loan	2,500
Property taxes	2,700
Total selling and administrative expenses		276,264
Net income		$160,656

Table (7)

To determine

Prepare I Electronics budgeted statement of retained earnings for 20x1.

Explanation of Solution

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

Prepare I Electronics budgeted statement of retained earnings for 20x1:

I Electronics
Budgeted Statement of Retained Earnings
For the First Quarter of, 20x1
Particulars	Amount ($)	Amount ($)
Retained earnings, 12/31/x0	$107,500
Add: Net income	160,656
Subtotal		268,156
Less: Dividends		50,000
Retained earnings, 12/31/x1		$218,156

Table (8)

To determine

Prepare I Electronics budgeted balance sheet as of March 31,20x1.

Explanation of Solution

Budgeted Balance Sheet: Budgeted Balance Sheet is one of the budgeted financial statements which summarize the budgeted assets, the liabilities, and the Shareholder’s equity of a company at a given date.

Prepare I Electronics budgeted balance sheet as of March 31,20x1:

I Electronics
Budgeted Balance Sheet
March 31, 20x1
Assets	Amount ($)
Cash	25,954
Accounts receivable	359,370
Inventory	186,340
Building and equipment (net of accumulated depreciation	676,000
Total assets	$1,247,664
Accounts payable	223,608
Bond interest payable	5,000
Property taxes payable	900
Bonds payable	300,000
Common stock	500,000
Retained earnings	218,156
Total liabilities and stockholders' equity	$1,247,664

Table (9)

Working note 1:

Calculate the amount of accounts receivable:

$\begin{array}{c}\text{Accounts receivable =}\left(\begin{array}{l}\text{Accounts receivable on 12/31/x0 +}\\ \text{ Sales on account }-\\ \text{ Total cash collections from credit sales}\end{array}\right)\\ \text{=}\left(\begin{array}{l}\$270,000+\$1,092,300\\ -\$1,002,930\left[\$109,230+893,700\right]\end{array}\right)\\ =\$359,370\end{array}$

Working note 2:

Calculate the amount of buildings and equipment:

$\begin{array}{c}\text{Buildings and equipment =}\left(\begin{array}{l}\text{Buildings and equipment balance}\\ \text{ +Cost of equipment}\text{acquired}-\\ \text{Depreciation amount }\end{array}\right)\\ =\left(\begin{array}{l}\$626,000+\$125,000\\ -\$75,000\end{array}\right)\\ =\$676,000\end{array}$

Working note 3:

Calculate the amount of accounts payable:

$\begin{array}{c}\text{Accounts payable =}\left(\begin{array}{l}\text{Accounts payable on 12/31/x0 +}\\ \text{ Purchases }-\\ \text{ Cash payment for purchases}\end{array}\right)\\ \text{=}\left(\begin{array}{l}\$176,400+\$1,051,820\\ -\$1,004,612\end{array}\right)\\ =\$223,608\end{array}$