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HMWK 9-45

“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 is a small, Company, concluded a meeting she had called with the firm’s top management.  Intercoastal is a small, rapidly growing wholesaler of consumer electronics 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 forcast.  She believes the company’s sales during the first quarter of 20×1 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, 20×0, is as follows:

CASH                                                                                       $35,000

ACCOUNTS RECEIVABLE                                                       270,000

MARKETABLE SECURITIES                                                    15,000

INVENTORY                                                                             154,000

BLDG’S AND EQUIPMENT                                                     626,000

TOTAL ASSETS                                                                      $1,100,000

ACCOUNTS PAYABLE                                                           $176,000

BOND INTEREST PAYABLE                                                       12,500

PROPERTY TAX PAYABLE                                                           3,600

BONDS PAYABLE (10% due 20×6)                                       300,000

COMMON STOCK                                                                   500,000

RETAINED EARNINGS                                                            107,500



Jack Hanson, the assistant controller, is now preparing a monthly budget for the first quarter of 20×1.  In the process, the following information has been accumulated:

1.       Projected sales for December of 20×0 are $400,000.  Credit sales typically are 75 percent of the total sales.  Intercoastal’s credit experience indicates that 10% of the credit sales are collected during the month of sale, and the remainder collected during the following month.

2.       Intercoastal’s cost of goods sold generally runs at 70% of sales.  Inventory is purchased on account and 40% 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 the Intercoastal’s other monthly expenses will be as follows:

SALES SALARIES                                                                         $21,000

ADVERTISING/PROMOTOIONS                                                 16,000

ADMINISTRATIVE SALARIES                                                      21,000

DEPRECIATION                                                                            25,000

INTEREST ON BONDS                                                                   2,500

PROPERTY TAXES                                                                             900

In addition, sales commission runs at 1% 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 firms warehouse just after the new year begins.  These equipment purchases will be financed primarily from the firm’s cash and marketable securities.  However, Davies-Lawry 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 3 months.  Hanson believes short term interest rates will be 10% 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 Intercoastals bonds is paid semiannually on January 31, and July 31 for the preceding 6 month period.

7.       Property taxes are paid semiannully on February 28 and August 31 for the preceding 6 month period.


Prepare Intercoastal Electronic Company’s master budget for the first quarter of 20×1 by completing the following schedules and statements.


1.       SALES BUDGET:

             20×0                                                                                                         20×1                           December                                                                          January  February  March 1st Qtr


Total Sales

Cash Sales

Sales on account




2.       Cash Receipts Budget:


                             January  February  March  1st Qtr


Cash Sales

Cash Collections from Credit sales (current Month)

Cash Collections from Credit Sales (preceding month)

Total cash receipts


3.       Purchasee Budget:


           20×0                                                                           20×1

January                                          January  February March 1st Qtr


Budgeted Cost of Goods Sold

Add: Desired ending inventory

Total goods needed

Less: Expected beginning Inventory



4.       Cash Disbursment Budget:



January  February  March  1st Qtr


Inventory purchases:

Cash payments for purchases(current month)

                                                     (preceding month)

Total cash payments for inventory purchase


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




5.       Complete the 1st three lines of the summary cash budget.  Then do the analysis of short term financing needs in requirement (6).  Then finish requirement (5).


Summar Cash Budget:



                        January  February  March  1st Qtr

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/x1)

Poceeds from bank loan(1/2/x1)

Purchase of equipment

Repayment of bank loan(3/31/x1)

Interest on bank loan

Payment on dividends

Change in cash balance during

1st quarter

Cash balance(1/1/x1)

Cash balance(3/31/x1)


6.       Analysis of short term financing needs:


Projected cash balances as of December 31, 20×0                        $

Less: Minimum cash balance                                                           _________


Cash available for equipment purchases                                        $

Projected proceeds from sale of marketing securities               _________


Cash available                                                                                      $

Less: Cost of investment in equipment                                         _________


Required short term borrowing                                                       $


7.       Prepare Intercoastal’s Electronics budgeted statement for the 1st quarter of 20×1.  (ignore income taxes)

8.       Prepare Intercoastal’s Electronics budgeted statement of retained earnings for the 1st quarter of 20×1.

9.       Prepare Intercoastal’s Electronics budgeted balance sheet as of March 31, 20×1. (Hint; On March 31, 20×1, Bond Interest Payable is $5,000 and Property Taxes Payable is $900.)




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