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The Observer Company is a small, rapidly growing wholesaler of consumer electronic products including small kitchen appliances and power tools. A sales forecast supplied by
The Observer Company is a small, rapidly growing wholesaler of consumer electronic products including small kitchen appliances and power tools. A sales forecast supplied by the Marketing Department predicts that sales during Quarter of x will increase by each month over the previous months sales. Then beginning in April x sales are expected to remain constant for the next several months. The Company is going to put some new equipment in operation just after the New Year begins. They hope to finance it largely with cash and the sale of marketable securities but if necessary they can get a shortterm loan from the Karch Bank. Observers Balance Sheet at December x is as follows:
Observer Company Balance Sheet Decx
Assets:
Cash $
Accounts Receivable
Marketable securities
Inventory
Building net of accumulated depreciation
Total Assets
Liabilities and Stockholder's Equity:
Accounts payable $
Bond interest payable
Property taxes payable
Bonds payable due in x
Common Stock
Retained Earnings $
Total L & SE $
As Assistant Controller for the Observer Company you are now preparing a monthly budget for Quarter of x In this process, the following information has been accumulated:
Projected Sales for December x are $ Credit sales typically are of total sales. Observers credit experience indicates that of credit sales are collected during the month of sale, and the remainder is collected during the following month.
Observers cost of goods sold is normally of sales. Inventory is purchased on account and of each months purchases are paid during the month of purchase. The remainder is paid during the following month. To have adequate amounts of inventory on hand Observer has a policy that inventory at the end of each month should equal half of the next months projected cost of goods sold.
Observers other monthly expenses are estimated as follows:
Sales Salaries $
Advertising & promotion $
Administrative salaries $
Depreciation $Includes depreciation on new equipment purchased at beginning of Quarter
Interest on Bonds $
Property taxes $
Sales Commissions percent of current months sales
The Company President has indicated that Observer will be investing $ in equipment to be used in the firms warehouse just after the New Year begins. This equipment purchase will be financed from the companys cash and marketable securities However, the President noted that Observer should keep a minimum cash balance of $ If necessary, the remainder of the equipment purchased will be financed using shortterm credit from the Karch Bank. The minimum period for such a loan is months with shortterm interest rates being per year. If a loan is needed the President has decided that it should be paid off at the end of the Quarter
Observers Board of Directors has indicated an intention to declare and pay cash dividends of $ on the last day of each quarter.
The interest on any shortterm borrowing will be paid when the loan is repaid. Interest on Observers Bonds is paid semiannually on January and July for the preceding sixmonth period.
Property taxes are paid semiannually on February and August for the preceding sixmonth period.
Assignment: Please clearly provide each of the below in a table:
For the First Quarter x
Sales Revenue
Less: Cost of Goods Sold
Gross Margin
Less: Selling & Administrative Expenses:
Sales salaries
Sales commissions
Advertising & promotion
Administrative salaries
Depreciation
Interest on bonds
Interest on shortterm loan
Property taxes
Total S & A Expenses
Net Income
Observer Company
Budgeted Balance Sheet
x
Assets:
Cash
Accounts Receivable
Inventory
Building & Equipment net of accumulated depreciation
Total Assets
Liabilities and Stockholder's Equity:
Accounts payable
Bond interest payable
Property taxes payable
Bonds payable due in x
Common Stock
Retained Earnings
Total Liabilities & Stockhoder's Equity
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