Case Study #2 Budgeting Quality Products, Inc. is in its second year of operations. The company is experiencing cash flow issues and would like to utilize a budget to forecast cash flows. You are an outside consultant hired to assist in designing a model that Quality Products can utilize on an ongoing basis to forecast cash flow. The president of the company, Mr. Clark, has predicted an increase in sales of two percent per month from December 2016 through March 2017. Mr. Clark believes that after March, sales will remain steady through June 2017. The projected balance sheet for Quality Products as of December 31, 2016 is shown below: Cash $ 20,000 Accounts receivable 208,748 Marketable securities 25,000 Inventory 25,750 Buildings and equipment (net of accumulated depreciation) 225,000 Total assets $ 504,498 Accounts payable $ 101,384 Sales commissions payable 6,885 Bond interest payable 4,800 Property taxes payable 0 Bonds payable (4%; due in 2020) 360,000 Common stock 10,000 Retained earnings 21,429 Total liabilities and stockholders' equity $ 504,498 You will need the following information to prepare a master budget for the first quarter of 2017: 1) Projected sales for November 2016 are $225,000. Credit sales comprise 95% of total sales. Sales collected in the month of sale total 15%, in the month following the month of sale total 70%, and in the second month following the month of sale total 13%. Remaining sales are uncollectible. 2) Cost of goods sold total 55% of sales. Inventory purchases are made on account. Purchases paid for in the month of purchase total 20% and purchases paid for in the month following the month of purchase total 80%. Ending monthly Inventory is maintained at 20% of the following months projected cost of goods. 3) Projected monthly expenses include: Sales salaries $ 60,000 Advertising and promotion 4,000 Administrative salaries 25,000 Depreciation 3,000 Interest on bonds 1,200 Property taxes 1,500 Sales commissions of 3.0 percent of sales are paid in the month following the month of sale. 4) Additional manufacturing equipment would allow the company to increase production. The cost of the new equipment is $150,000. Mr. Clark plans on purchasing the equipment on January 1st and plans on paying for the equipment with cash and by liquidating the companys marketable securities. Mr. Clark wishes to maintain a minimum cash balance of $15,000 at the end of each month. If necessary, he plans on obtaining a short-term note payable from a local bank. The minimum lending period for such a loan is three months. The current short-term interest rate is 7 percent per year and is expected to remain at this rate through the time the equipment is purchased. Mr. Clark would like to pay off the loan as quickly as possible. Payments must be made in $1,000 increments. 5) The board of directors would like to declare and pay dividends of $125,000 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 the bond payable is paid semiannually on February 28 and August 31 for the preceding six-month period. 7) Property taxes are paid quarterly on March 31, June 30, September 30, and December 31 for the preceding three-month period. Required: Assist Quality Products, Inc. by building a model to forecast cash flow. Set up your model for the first quarter of 2017. The model should contain the master budget schedules shown below. Round all amounts to the nearest dollar. The model should allow Quality Products to change the assumptions provided above and quickly recalculate the forecasted cash balance at March 31, 2017. The assumptions may be included on a separate worksheet in your Excel file but all of the schedules below must be on one worksheet. 1) Sales budget: 2016 2017 November December January February March 1st Quarter Total sales Cash sales Sales on account 2) Cash receipts budget: 2017 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 Cash collections from credit sales made during 2nd preceding month Total cash receipts 3) Purchases budget: 2016 2017 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: 2017 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) Summary cash budget: 2017 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 (1/1/17) Proceeds from bank loan (1/1/17) Purchase of equipment Repayment of bank loan (3/31/17) Interest on bank loan Payment of dividends Change in cash balance during the month Beginning cash balance Ending cash balance 1) Prepare a memo to the president of Quality Products, Inc. with at least two recommendations on how the company can ensure it completes the first quarter of 2017 with the minimum required cash balance. Your memo should provide specific financial information for your recommendations. Include a plan to support your recommendations. For example, if you recommend an increase in sales, how can this be attained. Be specific. You should provide support for your financial information by copying your model to another worksheet in your Excel file and changing the assumptions to reflect your recommendations. If you have your assumptions on a separate worksheet, your file should include four worksheets original assumptions, original budget, recommended assumptions, recommended budget.