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Glow, Inc. is interested in purchasing some new manufacturing equipment right after the beginning of the new year. They would like to finance the new equipment with cash and marketable securities, but if necessary they can get a short-term loan from a local bank. You have been engaged to prepare a master budget for Glow, Inc. for the first quarter of 2016. Glow, Inc. is a small, rapidly growing manufacturer of lighting equipment. The company’s main product line is table lamps. The marketing manager has recently completed a sales forecast. She believes the company’s sales during the first quarter of 2016 will increase by 15 percent each month over the previous month’s sales. Then sales are expected to remain constant for several months. Glow Inc.’s projected balance sheet as of December 31, 2015 is as follows:
Cash: 60,000
Accounts recevable 312,000
Marketable Securities 30,000
Inventrory 261,625
Buildings and equipiment (net of accumulated depreciation) 1,298,519
Total assets 1,962,144
Accounts payable 366,844
Bond interest payable 12,500
Property taxes payable (10% due in 2020) 600,000
Common stock 750,000
Retained earnings 228,000
Total liabilities and stockholder's equity 1,962,144
The controller is now preparing a budget for the first quarter of 2016. In the process, the following information has been accumulated:
1) Projected sales for December 2015 are $650,000. Credit sales are typically 60% of total sales. Glow, Inc.’s credit experience indicates that 20% of credit sales are collected during the month of sale, and the remainder are collected during the following month.
2) Glow, Inc.’s cost of goods sold generally runs at 70% of sales. Inventory is purchased on account and 25% 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 company attempts to have inventory on hand at the end of each month equal to half of the next month’s projected cost of goods sold.
3) The controller has estimated that Glow Inc.’s other monthly expenses will be as follows
Sales Salaries $20,000
Advertising and Promotion 25,000
administrative salaries 35,000
Depreciation 15,000
Interest on Bonds 2,500
Property taxes 1,200
In addition, sales commissions run at the rate of 3 percent of sales and are paid in the same month as the sale.
4) The company president has indicated that the company should invest $275,000 in state of the art manufacturing equipment just after the new year begins. This equipment purchase will be financed primarily from the company’s cash and marketable securities. However, the president believes the company needs to keep a minimum cash balance of $50,000. If necessary, the remainder of the equipment purchase will be financed using short-term credit from a local bank. The minimum period for such a loan is three months. The current short-term interest rates are 8 percent per year and are expected to remain at this rate through the time the equipment is purchased. If a loan is necessary, the president has decided it should be paid off by the end of the first quarter if possible.
5) Glow, Inc.’s board of directors has indicated an intention to declare and pay dividends of $100,000 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 Glow, Inc.’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.
Required: Prepare Glow, Inc.’s master budget for the first quarter of 2016 by completing the following schedules and statements. Round all answers to the nearest dollar (do not include cents).
1) Sales budget: 2015 2016
December January February March 1st Quarter
Total sales
Cash sales
Sales on account
2) Cash receipts budget: 2016
January February March 1st Quarter
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: 2015 2016
December January February March 1st Quarter Budgeted cost of goods sold
Add: Desired ending inventory
Total goods needed
Less: Expected beginning inventory
Purchases
4) Cash disbursements budget: 2016
January February March 1st 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
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 first three lines of the summary budget. Then do the analysis of short-term financing needs in requirement (6). Use this answer to help complete requirement (5).
Summary cash budget:
20x1
January February March 1st Quarter
Cash receipts (sch 2)
Less: Cash disbursements (sch 4)
Change in cash balance during period due to operations
Sale of marketable securities (1/2/16)
Proceeds from bank loan (1/2/16)
Purchase of equipment Repayment of bank loan (3/31/16)
Interest on bank loan
Payment of dividends
Change in cash balance during first quarte XXXXX XXXXX XXXXX
Cash balance, 1/1/16 XXXXX XXXXX XXXXX
Cash balance, 3/31/16 XXXXX XXXXX XXXXX
6) Analysis of short-term financing needs:
Projected cash balance as of December 31, 2015
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 Glow, Inc.’s budgeted income statement for the first quarter of 2016. (Ignore income taxes.)
8) Prepare Glow, Inc.’s budgeted statement of retained earnings for the first quarter of 2016.
9) EXTRA CREDIT (5 points): Prepare Glow, Inc.’s budgeted balance sheet as of March 31, 2016. (Hint: On March 31, 2016, Bond Interest Payable is $5,000 and Property Taxes Payable is $1,200
Explanation / Answer
1) Sales budget: 2015 2016 December January Feb March Total sales 650000 747500 859625 988568.75 Cash sales 260000 299000 343850 395427.5 Sales on account 390000 448500 515775 593141.25 2) Cash receipts budget: 2016 January Feb March Total Cash sales 299000 343850 395427.5 1038277.5 Cash collections from credit sales made during current month 149500 171925 197713.75 519138.75 Cash collections from credit sales made during preceding month 390000 299000 343850 1032850 Total cash receipts 838500 814775 936991.25 2590266.25 3) Purchases budget: 2015 2016 December January Feb March Cost of Good Sold 455000 523250 601737.5 691998.1 Add: Desired ending inventory 261625 300868.75 345999 345999.1 Total goods needed 716625 824118.75 947736.56 1037997.2 Less: Expected beginning inventory 325000 261625 300868.75 345999.1 Purchases 391625 562493.75 646867.81 691998.1 4) Cash disbursements budget: 2016 January Februry March Inventory purchases: Cash payments for purchases during the current month 140623.4 161717.0 172999.5 Cash payments for purchases during the preceding month 293718.8 421870.3 485150.9 Total cash payments for inventory purchases 434342.2 583587.3 658150.4 Other expenses: Sales salaries 20000.0 20000.0 20000.0 Advertising and promotion 25000.0 25000.0 25000.0 Administrative salaries 35000.0 35000.0 35000.0 Interest on bonds 15000.0 0.0 0.0 Property taxes 7200.0 Sales commissions 22425.0 25788.8 29657.1 Total cash payments for other expenses 117425.0 112988.8 109657.1 Total cash disbursements 551767.2 696576.0 767807.5 6.) Analysis of short-term financing needs: Projected cash balance as of December 31, 2015 60000 Less: minimum cash balance -50000 Cash available for equipment purchases 10000 Projected proceeds from sale of marketable securities 30000 Cash available 40000 Less: Cost of investment in equipment -275000 Short term borrowings taken 235000 Minimum cash balance E 50000