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 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 Wilcox, Intercoastals General Manager of Marketing, has recently completed a sales forecast. She believes the companys sales during the first quarter of 20x1 will increase by 10 percent each month over the previous months sales. Then Wilcox expects sales to remain constant for several months. Intercoastals projected balance sheet as of December 31, 20x0, is as follows:

Cash	$	35,000
Accounts receivable		252,000
Marketable securities		10,000
Inventory		231,000
Buildings and equipment (net of accumulated depreciation)		670,000
Total assets	$	1,198,000
Accounts payable	$	220,500
Bond interest payable		22,500
Property taxes payable		4,800
Bonds payable (15%; due in 20x6)		360,000
Common stock		400,000
Retained earnings		190,200
Total liabilities and stockholders equity	$	1,198,000

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 $600,000. Credit sales typically are 60 percent of total sales. Intercoastals credit experience indicates that 30 percent of the credit sales are collected during the month of sale, and the remainder are collected during the following month.

2. Intercoastals cost of goods sold generally runs at 70 percent of sales. Inventory is purchased on account, and 50 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.

3. Hanson has estimated that Intercoastals other monthly expenses will be as follows:

   Sales salaries	$	45,000
   Advertising and promotion		25,000
   Administrative salaries		45,000
   Depreciation		15,000
   Interest on bonds		4,500
   Property taxes		1,200

   In addition, sales commissions run at the rate of 2 percent of sales.

4. Intercoastals president, Davies-Lowry, has indicated that the firm should invest $115,000 in an automated inventory-handling 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, 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.

Inventory purchases:
Cash payments for purchases during the current month	$242,550selected answer correct	$266,805selected answer correct	not attempted	not attempted
Cash payments for purchases during the preceding month	not attempted	not attempted	not attempted	not attempted
Total cash payments for inventory purchases	$242,550	$266,805	$0	$0
Other expenses:
Sales salaries	$45,000selected answer correct	$45,000selected answer correct	$45,000selected answer correct	not attempted
Advertising and promotion	25,000selected answer correct	25,000selected answer correct	25,000selected answer correct	not attempted
Administrative salaries	45,000selected answer correct	45,000selected answer correct	45,000selected answer correct	not attempted
Interest on bonds	27,000selected answer correct	0selected answer correct	0selected answer correct	not attempted
Property taxes	0selected answer correct	7,200selected answer correct	0selected answer correct	not attempted
Sales commissions	not attempted	not attempted	not attempted	not attempted
Total cash payments for other expenses	$142,000	$122,200	$115,000	$0
Total cash disbursements	not attempted	not attempted	not attempted

1. Intercoastals board of directors has indicated an intention to declare and pay dividends of $50,000 on the last day of each quarter.

	20x1
	January	February	March	First Quarter
Cash receipts (from part 2)	$396,000	$435,600	$479,160
Less: Cash disbursements (from part 4)
Change in cash balance during period due to operations	$396,000	$435,600	$479,160	$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

1. The interest on any short-term borrowing will be paid when the loan is repaid. Interest on Intercoastals bonds is paid semiannually on January