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 Global Electronics Company, concluded a meeting she had called with the firm’s top management. Global 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, Global Electronics’ 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. Global’s projected balance sheet as of December 31, 20x0 is as follows: Cash .............................................................................. ………………….$ 70,000 Accounts receivable ...................................................... ………………….540,000 Marketable securities ..................................................... ………………….30,000 Inventory ...................................................................... …………………..308,000 Buildings and equipment (net of accumulated depreciation) ...... 1,252,000 Total assets ..................................................................................... $2,200,000 Accounts payable .............................................................................. $ 352,800 Bond interest payable ............................................................................ 25,000 Property taxes payable ............................................................................. 7,200 Bonds payable (10%; due in 20x6) ..................................................... 600,000 Common stock ................................................................................... 1,000,000 Retained earnings ................................................................................. 215,000 Total liabilities and stockholders’ equity .........................................$2,200,000 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 $800,000. Credit sales typically are 75 percent of total sales. Global’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. Global Electronics’ 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 Global’s other monthly expenses will be as follows: Sales salaries ................................................................................... $42,000 Advertising and promotion ............................................................... 32,000 Administrative salaries ..................................................................... 42,000 Depreciation ....................................................................................... 50,000 Interest on bonds ................................................................................. 5,000 Property taxes ...................................................................................... 1,800 In addition, sales commissions run at the rate of 1 percent of sales. 4. Global Electronics’ president, Davies-Lowry, has indicated that the firm should invest $250,000 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 the company needs to keep a minimum cash balance of $50,000. 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. Global Electronics’ board of directors has indicated an intention to declare and pay dividends of $100,000 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 Global Electronics’ 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: Prepare Global Electronics Company’s master budget for the first quarter of 20x1 by completing the following schedules and statements. 1. Sales budget: 
2. Cash receipts budget 
3. Purchases budget: 
4. Cash disbursements budget: 
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: Projected cash balance as of December 31, 20x0 ........................................... $ Less: Minimum cash balance ............................................................................. Cash available for equipment purchases .........................................................$ Projected proceeds from sale of marketable securities .................................... Cash available .................................................................................................... $ Less: Cost of investment in equipment ............................................................. Required short-term borrowing ........................................................................$ 7. Prepare Global Electronics’ budgeted income statement for the first quarter of 20x1. (Ignore income taxes.) 8. Prepare Global Electronics’ budgeted statement of retained earnings for the first quarter of 20x1. 9. Prepare Global Electronics’ budgeted balance sheet as of March 31, 20x1. (Hint: On March 31, 20x1, Bond Interest Payable is $10,000 and Property Taxes Payable is $1,800.)
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20x0 20x1 December January February March 1st Quarter Total sales Cash sales Sales on account ....................... 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 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 ............................. 20x1 January February March 1st Quarter Inventory purchases: Cash payments for purchases during the current month" Cash payments for purchases during the preceding montht. Total cash payments for inventory purchases Other expenses: Sales salaries Advertising and promotion Administrative salaries Interest on bonds . Property taxest 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. 20x1 January February March 1st Quarter Cash receipts (from schedule 2) Less: Cash disbursements (from schedule 4) Change in cash balance during period due to operations Sale of marketable securities (1/2/x1) Proceeds from bank loan (1/2/x1) Purchase of equipment Repayment of bank loan (3/31/x1) Interest on bank loan Payment of dividends Change in cash balance during first quarter Cash balance, 1/1/x1 .... Cash balance, 3/31/x1
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