"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: 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 (6%; due in 20x6) Common stock Retained earnings Total liabilities and stockholders' equity $ 40,000 280,000 20,000 192,500 544,000 $1,076,500 $ 257,250 3,750 3,600 150,000 500,000 161,900 $1,076,500 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 $ 30,000 20,000 30,000 20,000 750 900 In addition, sales commissions run at the rate of 1 percent of sales. 4. Intercoastal's president, Davies-Lowry, has indicated that the firm should invest $125,000 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 $25,000. 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 $50,000 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 1. Sales budget Total sales Cash sales Sales on account 20x0 December January February 20x1 March First Quarter 0 0 0 0 2. Cash receipts budget. 20x1 January February Marchi First Quarter Cash sales Cash collections from credit sales made during current month Cash collections from credit sales made during preceding month Total cash receipts $ 0 $ OS 0 $ 0 3. Purchases budget 20x0 December January February 20x1 March First Quarter Budgeted cost of goods sold Add Desired ending inventory Total goods needed $ 05 0 $ 0 $ 05 0 Less Expected beginning inventory Purchases $ 05 05 05 05 0 4. Cash disbursements budget (Round your inventory purchases up to the nearest whole dollar.) 20x1 January February March First 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 S 0 S 0 $ 0 $ Other expenses Sales salaries Advertising and promotion Administrative salaries Interest on bonds Property taxes Sales commissions Total cash payments for other expenses $ 05 0 $ 0 $ 0 Total cash disbursements 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. Cash receipts (from part 2) Less Cash disbursements (from part 4) 20x1 January February March First Quarter Change in cash balance during period due to operations $ 0 $ 0 $ 0 $ 0 Sale of marketable securities (1/2/x1) Proceeds from bank loan (1/2/x1) Purchase of equipment Repayment of bank loan (3/31/x1) Interest on bank loan Payment of dividends Change in cash balance during first quarter Cash balance, 1/1/x1 Cash balance, 3/31/x1