The following information applies to the questions displayed below. 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 $55,000 280,000 15,000 192,500 675,000 $1,217,500 $ 257,250 8,250 4,800 330,808 500,000 117,200 $1,217,500 as Accounts receivable Marketable securities Inventory Buildings and equipment (net of accumulated depreciation) Total assets Accounts payable Bond interest payable Property taxes payable Bonds payable (6%; due in 20x6) Common stock Retained earnings Total liabilities and stockholders' equity 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 $500,000. Credit sales typically are 70 percent of total sales. Intercoastal's credit experience indicates that 20 percent of the credit sales are collected during the month of sale, and the remainder are collected during the following month. 2. Intercoastal's cost of goods sold generally runs at 70 percent of sales. Inventory is purchased on account, and 30 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 Intercoastal's other monthly expenses will be as follows: Sales salaries Advertising and promotion Administrative salaries Depreciation Interest on bonds Property taxes 35,000 16,000 35,000 20,000 1,650 1,200 In addition, sales commissions run at the rate of 3 percent of sales. 4. Intercoastal's president, Davies-Lowry, has indicated that the firm should invest $105,000 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 $40,000. 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. Intercoastal's board of directors has indicated an intention to declare and pay dividends of $75,000 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 Intercoastal'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 Intercoastal Electronics Company's master budget for the first quarter of 20x1 by completing the following schedules and statements. 1. Sales budget: 20x0 20x1 First December January February MarchQuarter Total sales Cash sales Sales on accountT.. $500,000 $550,000 $605,000 $665,500 $1,820,500 546,150 350,000 385,000 423,500 465,850 1,274,350 150,000 165,000 181,500 199,650 "30% of total sales. 170% of total sales. 2. Cash receipts budget: 20x1 First January February March Quarter $165,000 $181,500 $199,650 546,150 Cash sales Cash collections from credit sales made during current month* 77,000 84,700 93,170 254,870 Cash collections from credit sales made during preceding monthT 280,000 308.000 338,800 926.800 Total cash receipts "20% of current month's credit sales. 180% of previous month's credit sales. 3. Purchases budget: 20x0 First Quarter December January February March Budgeted cost of goods sold Add: Desired $350,000 $385,000 $423,500 $465,850 $1,274,350 ending inventory192,500 211750 232,925 232,925_232.925 Total goods $542,500$596,750 $656,425 $698,775 $1,507,275 needed Less: Expected beginning 175,000 192.500 211.750 232925 192.500* inventory... Purchases .. Since April's expected sales and cost of goods sold are the same as the projections for March, the desired ending inventory for March is the same as that for Februa The desired ending inventory for the quarter is equal to the desired ending inventory on March 31, 20x1 *The beginning inventory for the quarter is equal to the December ending inventory 50% x $350,000 (where $280,000-December cost of goods sold-December sales of $500,000 x 70%) Answer for Required 4 Schedule of Expected Cash Disbursements Jan Feb Mar Quarter Inventory purchases: Cash payments for current month purchases 121,275 133,403 $261,030 $ 515,708 current month Required purchases x 3096 Accounts Payable Cash payments for Last mont purchases 257,250 282,975 311,273 $ 851,498 609,070 Last month Required purchases x 70% ( For April, March Accounts payable ) Total cash payments for inventory purchases S 378,525 S 416,378 S 572,303 $1,367,205 Other expenses Sales salaries Advertising and promotions Administrative salaries Interest on bonds Property taxes Sales commission 35,000 $ 35,000 $ 35,000 105,000 16,000 $ 16,000 $ 16,000 48,000 35,000 $ 35,000 $ 35,000 $ 105,000 -S9,900 -S7,200 16,500 18,150 $ 19,965 54,615 9,900 $ -$7,200 $ Current month Sales x 3% Total cash payments for Other expenses S112,400 $ 111,350 105,965 $ 329,715 490,925 $ 527,728 678,268 $1,696,920 Total cash disbursements = Total cash payments for inventory purchases + Total cash payments for Other expenses Answer for Required 5 Analysis of Short term Financing needs Jan Feb Mar Quarter S 522,000 $ 574,200 631,620 $1,727,820 S 490,925 $ 527,728 678,268 $1,696,920 Change in balance during period due to operations 31,075 46,473 $ (46,648) 30,900 15,000 $ 45,000 $ 120,000 $ (105,000) Cash receipts (from part 2) Less: Cash disbursements (from part 4) Cash receipts Cash disbursements Sale of marketable securities $ 15,000 $ $ 75,000 $ $ (105,000) $ Proceeds from bank loan Purchase equipment Repayment of bank loan Interest on bank loan Payment of dividends $ (75,000) $ (75,000) Change in cash balance during 1st Quarter Change in balance during period due to operations+Sale marketable securities +Proceeds from bank $ 16,075 $ 46,473 $ (76,648) (14,100) Purchase of equipment - Repayment of bank loand- Interest on bank loan-Payment of dividends Cash balance, 1/1/x1 Cash balance, 3/31/x1 $55,000 $ 40,900 Change in cash balance during 1st QuarterCash balance, 1/1/x1 Answer for Required 6 Projected cash balance as of December 20x0 Less: Minimum cash balance Cash available for equipment purchase S 55,000 40,000 $ 15,000 $ 15,000 $ 30,000 $ 105,000 S (75,000) Projected cash balance as of December 20x0-Minimum cash balance Projected proceeds from sale of Marketable securites Cash available Cash available for equipment purchase +Projected proceeds from sale of Marketable securites Less: Cost of investment in equipment Required short term borrowing Cash available- Cost of investment in equipment 7. Prepare Intercoastal Electronics' budgeted income statement for the first quarter of 20x1. (Ignore income taxes.) INTERCOASTAL ELECTRONICS COMPANY Budgeted Income Statement For the First Quarter of 20x1 Selling and administrative expenses: Total selling and administrative expenses 8. Prepare Intercoastal Electronics' budgeted statement of retained earnings for the first quarter of 20x1 INTERCOASTAL ELECTRONICS COMPANY Budgeted Statement of Retained Earnings For the First Quarter of 20x1 Retained earnings, 12/31/x0 Retained earnings, 3/31/x1 9. Prepare Intercoastal Electronics' budgeted balance sheet as of March 31, 20x1. (Hint: On March 31, 20x1, Bond Interest Payable is $3,300 and Property Taxes Payable is $1,200.) INTERCOASTAL ELECTRONICS COMPANY Budgeted Balance Sheet March 31, 20x1 Total assets Total liabilities and stockholders' equity