Case Study #2 Budgeting Glow, Inc. is interested in purchasing some new manufacturing equipment right after the beginning of the new year. They would like to finance the new equipment with cash and marketable securities, but if necessary they can get a short-term loan from a local bank. You have been engaged to prepare a master budget for Glow, Inc. for the first quarter of 2016. Glow, Inc. is a small, rapidly growing manufacturer of lighting equipment. The companys main product line is table lamps. The marketing manager has recently completed a sales forecast. She believes the companys sales during the first quarter of 2016 will increase by 15 percent each month over the previous months sales. Then sales are expected to remain constant for several months. Glow Inc.s projected balance sheet as of December 31, 2015 is as follows: Cash $ 60,000 Accounts receivable 312,000 Marketable securities 30,000 Inventory 261,625 Buildings and equipment (net of accumulated depreciation) 1,298,519 Total assets $ 1,962,144 Accounts payable $ 366,844 Bond interest payable 12,500 Property taxes payable 4,800 Bonds payable (10%; due in 2020) 600,000 Common stock 750,000 Retained earnings 228,000 Total liabilities and stockholders' equity $ 1,962,144 The controller is now preparing a budget for the first quarter of 2016. In the process, the following information has been accumulated: 1) Projected sales for December 2015 are $650,000. Credit sales are typically 60% of total sales. Glow, Inc.s credit experience indicates that 20% of credit sales are collected during the month of sale, and the remainder are collected during the following month. 2) Glow, Inc.s cost of goods sold generally runs at 70% of sales. Inventory is purchased on account and 25% of each months 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 company attempts to have inventory on hand at the end of each month equal to half of the next months projected cost of goods sold. 3) The controller has estimated that Glow Inc.s other monthly expenses will be as follows: Sales salaries $ 20,000 Advertising and promotion 25,000 Administrative salaries 35,000 Depreciation 15,000 Interest on bonds 2,500 Property taxes 1,200 In addition, sales commissions run at the rate of 3 percent of sales and are paid in the same month as the sale. 4) The company president has indicated that the company should invest $275,000 in state of the art manufacturing equipment just after the new year begins. This equipment purchase will be financed primarily from the companys cash and marketable securities. However, the president believes the company needs to keep a minimum cash balance of $50,000. If necessary, the remainder of the equipment purchase will be financed using short-term credit from a local bank. The minimum period for such a loan is three months. The current short-term interest rates are 8 percent per year and are expected to remain at this rate through the time the equipment is purchased. If a loan is necessary, the president has decided it should be paid off by the end of the first quarter if possible. 5) Glow, Inc.s 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 Glow, Inc.s 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 Glow, Inc.s master budget for the first quarter of 2016 by completing the following schedules and statements. Round all answers to the nearest dollar (do not include cents). 1) Sales budget: 2015 2016 December January February March 1st Quarter Total sales Cash sales Sales on account 2) Cash receipts budget: 2016 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 3) Purchases budget: 2015 2016 December January February March 1st Quarter Budgeted cost of goods sold Add: Desired ending inventory Total goods needed Less: Expected beginning inventory Purchases 4) Cash disbursements budget: 2016 January February March 1st Quarter Inventory purchases: Cash payments for purchases during the current month Cash payments for purchases during the preceding month Total cash payments for inventory purchases Other expenses: Sales salaries Advertising and promotion Administrative salaries Interest on bonds Property taxes Sales commissions Total cash payments for other expenses Total cash disbursements 5) Complete the first three lines of the summary budget. Then do the analysis of short-term financing needs in requirement (6). Use this answer to help complete requirement (5). Summary cash budget: 20x1 January February March 1st Quarter Cash receipts (sch 2) Less: Cash disbursements (sch 4) Change in cash balance during period due to operations Sale of marketable securities (1/2/16) Proceeds from bank loan (1/2/16) Purchase of equipment Repayment of bank loan (3/31/16) Interest on bank loan Payment of dividends Change in cash balance during first quarter XXXXX XXXXX XXXXX Cash balance, 1/1/16 XXXXX XXXXX XXXXX Cash balance, 3/31/16 XXXXX XXXXX XXXXX 6) Analysis of short-term financing needs: Projected cash balance as of December 31, 2015 $ 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 Glow, Inc.s budgeted income statement for the first quarter of 2016. (Ignore income taxes.) 8) Prepare Glow, Inc.s budgeted statement of retained earnings for the first quarter of 2016. 9) EXTRA CREDIT (5 points): Prepare Glow, Inc.s budgeted balance sheet as of March 31, 2016. (Hint: On March 31, 2016, Bond Interest Payable is $5,000 and Property Taxes Payable is $1,200.)