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We really need to get this new material - handling equipment in operation just after the new year begins. I hope we can finance it
We really need to get this new materialhandling 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 shortterm loan down at MetroBank. This statement by Beth DaviesLowry, president of Intercoastal Electronics Company, concluded a meeting she had called with the firms top management. Intercoastal is a small, rapidly growing wholesaler of consumer electronic products. The firms main product lines are small kitchen appliances and power tools. Marcia Polosky, Intercoastals General Manager of Marketing, has recently completed a sales forecast. She believes the companys sales during the first quarter of x will increase by percent each month over the previous months sales. Then Polosky expects sales to remain constant for several months. Intercoastals projected balance sheet as of December x is as follows:
Cash $
Accounts receivable
Marketable securities
Inventory
Buildings and equipment net of accumulated depreciation
Total assets $
Accounts payable $
Bond interest payable
Property taxes payable
Bonds payable ; due in x
Common stock
Retained earnings
Total liabilities and stockholders equity $
Joaquin Rafael, the assistant controller, is now preparing a monthly budget for the first quarter of x In the process, the following information has been accumulated:
Projected sales for December of x are $ Credit sales typically are percent of total sales. Intercoastals credit experience indicates that percent of the credit sales are collected during the month of sale, and the remainder are collected during the following month.
Intercoastals cost of goods sold generally runs at percent of sales. Inventory is purchased on account, and 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 half of the next months projected cost of goods sold.
Rafael has estimated that Intercoastals other monthly expenses will be as follows:
Sales salaries $
Advertising and promotion
Administrative salaries
Depreciation
Interest on bonds
Property taxes
In addition, sales commissions run at the rate of percent of sales.
Intercoastals president, DaviesLowry, has indicated that the firm should invest $ in an automated inventoryhandling system to control the movement of inventory in the firms warehouse just after the new year begins. These equipment purchases will be financed primarily from the firms cash and marketable securities However, DaviesLowry believes that Intercoastal needs to keep a minimum cash balance of $ If necessary, the remainder of the equipment purchases will be financed using shortterm credit from a local bank. The minimum period for such a loan is three months. Rafael believes shortterm interest rates will be percent per year at the time of the equipment purchases. If a loan is necessary, DaviesLowry has decided it should be paid off by the end of the first quarter if possible.
Intercoastals board of directors has indicated an intention to declare and pay 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 Intercoastals 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.
Required:
Prepare Intercoastal Electronics Companys master budget for the first quarter of x by completing the following schedules and statements.
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