We really need to get this new high-precision cutter equipment in operation just after the next quarter 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 Fashionable Credit Union. This statement by Joanna Size, President of Women Designer Company, concluded a meeting she had called with the firms top management. Women is a small, rapidly growing wholesaler of casual and professional clothes products. The firms main product lines are women's wear and accessories. John Weng, Women's General Manager of Merchandising, has recently completed a sales forecast. He believes the companys sales during the next quarter ending March 31, 2021 will increase by 20 percent each month over the previous months sales. Then Weng expects sales to remain constant for several months. Women's projected balance sheet as of December 31, 2020, is as follows:

Cash $ 90,000

Accounts receivable 175,000

Marketable securities 50,000

Inventory 300,000

Buildings and equipment (net of accumulated depreciation) 1,250,000

Total assets $1,865,000

Accounts payable $ 225,000

Bond interest payable 22,000

Property taxes payable 16,800

Bonds payable (11%; due in 2026) 600,000

Common stock 750,000

Retained earnings 251,200

Total liabilities and stockholders equity $1,865,000

Karen Complete, the Controller, is now preparing a monthly budget for the first quarter of 2021. In the process, the following information has been accumulated:

1.

Projected sales for December of 2020 are $500000. Credit sales typically are 80 percent of total sales. Women'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.

Womens cost of goods sold generally runs at 42 percent of sales. Inventory is purchased on account, and 35 percent 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 firm attempts to have inventory at the end of each month equal to 25% of the next months projected cost of goods sold.

3.

Complete has estimated that Womens other monthly expenses will be as follows:

Sales salaries $65,000

Advertising and promotion 20,000

Administrative salaries 45,000

Depreciation 23,000

Interest on bonds 5,500

Property taxes 4,200

In addition, sales commissions run at the rate of 5 percent of sales.

4.

Womens President, Joanna Size, has indicated that the firm should invest $500000 in an automated high-precision cutter system to control the movement of inventory in the firms warehouse just after the new quarter begins. These equipment purchases will be financed primarily from the firms cash and marketable securities. However, Joanna Size believes that Women needs to keep a minimum cash balance of $130000. 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. Complete believes short-term interest rates will be 13 percent per year at the time of the equipment purchases. If a loan is necessary, Joanna Size has decided it should be paid off by the end of the next quarter if possible.

5.

Women Designer Companys board of directors has indicated an intention to declare and pay dividends of $50000 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 Womens bonds is paid semiannually on February 28 and August 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.

1.

Sales budget: 2020 2021 Quarter

December January February March Total

Total sales

Cash sales

Sales on account

2.

Cash receipts budget: 2021 Quarter

January February March Total

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: 2020 2021 Quarter

December January February March Total

Budgeted cost of goods sold

Add: Desired ending inventory

Total goods needed

Less: Expected beginning inventory

Purchases

4.

Cash disbursements budget:

2021 Quarter

January February March Total

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

*35% of the current months purchases (schedule 3).

65% of the prior months purchases (schedule 3).

Bond interest is paid every six months, on February 28 and August 31. Property taxes also are paid every six months, on February 28 and August 31.

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:

2021 Quarter

January February. March Total

Cash receipts (from schedule 2)

Less: Cash disbursements (from schedule 4)

Change in cash balance during period due to operations

Sale of marketable securities (1/2/2021)

Proceeds from bank loan (1/2/2021)

Purchase of equipment

Repayment of bank loan (3/31/2021)

Interest on bank loan

Payment of dividends

Change in cash balance during the quarter

Cash balance, 1/1/2021

Cash balance, 3/31/2021

6.

Analysis of short-term financing needs:

Projected cash balance as of 12/31/2020

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 Women Designer Company's budgeted income statement for the quarter ended March 31, 2021. (Ignore income taxes.)

8.

Prepare Women Designer Company's budgeted statement of retained earnings for the quarter ended March 31, 2021.

9.

Prepare Women Designer Companys budgeted balance sheet as of March 31, 2021. (Hint: On March 31, 2021, Bond Interest Payable is $5500 and Property Taxes Payable is $4200.)

10.

Case 1:

Credit sales are 85% (rather than 80%) of total sales and 25% (rather than 20%) of the credit sales are collected during the month of sale with the remainder collected during the following month.

11.

Case 2:

Cost of goods sold is 45% (rather than 42%) of sales and 38% (rather than 35%) of inventory purchases is paid during the month of purchase, and the remainder is paid during the following month of purchase.

12.

Case 3:

Inventory levels are maintained at the end of each month equal to 15% (rather than 25%) of the next months projected cost of goods sold. Note: Do not change December 31, 2020 ending inventory.