Managerial Accounting Chapter 9

CHAPTER 9: CASE STUDY 9-45 Comprehensive Master Budget; Borrowing; Acquisition of Automated Material-Handling System Rene Morel Embry-Riddle Aeronautical University Online

MBAA 517 Instructor: Dr. Ana Machuca

Managerial Accounting Chapter 9 Activity 5.5 Case Study 5 9-45 In this activity, you will solve a case out of your textbook, Managerial Accounting. The intent of the Case Studies is to show how to analyze module related managerial accounting financial data in an organizations setting. For this case study, you will be able to demonstrate your ability to correctly calculate a master budget. Your fifth Case Study will be Case 9-45: Comprehensive Master Budget, Borrowing, Acquisition of Automated Material-Handling System. This case can be found at the end of Chapter 9. The primary focus of this case study is to develop a comprehensive master budget. Your assignment is to complete the requirements identified for Case 9-45: 1. Sales Budget, 2. Cash Receipts Budget, 3. Purchases Budget, and 4. Cash Disbursement Budget. This Case Study is due by the last day of Module 5.

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 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 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, 20x10, is as follows:
INTERCOASTAL'S PROJECTED BALANCE SHEET Cash Accounts receivable Marketable Securities Inventory Buildings and Equipment Total Assets Accounts payable Bond interest payable property taxes payable Bonds payable (10% Due in 20x6) Common Stock Retained Earnings Total Liabilities and Stockholder's Equity $35,000.00 $270,000.00 $15,000.00 $154,000.00 $626,000.00 $1,100,000.00 $176,400.00 $12,500.00 $3,600.00 $300,000.00 $500,000.00 $107,500.00 $1,100,000.00

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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 $400,000. Credit sales typically are 75% of total sales. Intercoastals credit experience indicates that 10 percent of the credit sales are collected during the month of sale, and the remainder are collected during the following month. 2. Intercoastals COGS generally runs at 70% of sales. Inventory is purchased on account, and 40% 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 COGS. 3. Hanson has estimated that Intercoastals other monthly expenses will be as follows:
Sales salaries Advertising and promotion Administrative salaries Depreciation Interest on bonds Property taxes $21,000.00 $16,000.00 $21,000.00 $25,000.00 $2,500.00 $900.00

In addition, sales commissions run at the rate of 1 percent of sales.

4. Intercoastals 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 firms cash and marketable securities. However, Davies-Lowry believes that Intercoastal needs to keep a minimum cash balance of $25,000.00. 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. Intercoastals 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 six-month period.

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7. Property taxes are paid semiannually on February 28 and August 31 for the preceding six-mont period. Required: Prepare Intercoastal Electronics Companys master budget for the first quarter of 20x1 completing the following schedules and statements.
1. Sales Budget 20x0 20x1 December January February March 1st Quarter $400,000.00 $440,000.00 $484,000.00 $532,400.00 $1,456,400.00 $100,000.00 $110,000.00 $121,000.00 $133,100.00 $364,100.00 $300,000.00 $330,000.00 $363,000.00 $399,300.00 $1,092,300.00

Total Sales Cash sales Sales on account

2. Cash Receipts budget:

2011 January February March 1st Quarter $110,000.00 $121,000.00 $133,100.00 $364,100.00

Cash sales Cash collections from credit sales made during current month Cash collections from credit sales made during preceding month Total cash receipts

$33,000.00

$36,300.00

$39,930.00

$109,230.00

$270,000.00 $413,000.00

$297,000.00 $454,300.00

$326,700.00 $499,730.00

$893,700.00 $1,367,030.00

3. Purchases budget:
20x0 December $280,000.00 $154,000.00 $434,000.00 $140,000.00 $294,000.00 20x1 January $308,000.00 $169,400.00 $477,400.00 $154,000.00 $323,400.00 February $338,800.00 $186,340.00 $525,140.00 $169,400.00 $355,740.00 March $372,680.00 $186,340.00 $559,020.00 $186,340.00 $372,680.00 1st Quarter $1,019,480.00 $186,340.00 $1,205,820.00 $154,000.00 $1,051,820.00

Budgeted COGS Add: Desired ending inventory Total goods needed Less: Expected beginning Inventory Purchases

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4. Cash disbursements budget:

20x1 January 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 $129,360.00 February $142,296.00 March $149,072.00 1st Quarter $420,728.00

$176,400.00

$194,040.00

$213,444.00

$583,884.00

$305,760.00 $21,000.00 $16,000.00 $21,000.00 $15,000.00 $0.00 $4,400.00 $77,400.00 $383,160.00

$336,336.00 $21,000.00 $16,000.00 $21,000.00 $0.00 $5,400.00 $4,840.00 $68,240.00 $404,576.00

$362,516.00 $21,000.00 $16,000.00 $21,000.00 $0.00 $0.00 $5,324.00 $63,324.00 $425,840.00

$1,004,612.00 $63,000.00 $48,000.00 $63,000.00 $15,000.00 $5,400.00 $14,564.00 $208,964.00 $1,213,576.00

5. Complete the first three lines of the summary cash budget. Then do the analysis of shortterm financing needs in requirement 6. Then finish requirement 5.
20x1 January February March 1st Quarter $413,000.00 $454,300.00 $499,730.00 $1,367,030.00 ($383,160.00) $29,840.00 $15,000.00 $100,000.00 ($125,000.00) ($100,000.00) ($2,500.00) ($50,000.00) ($100,000.00) ($2,500.00) ($50,000.00) ($9,046.00) $35,000.00 $25,954.00 ($404,576.00) $49,724.00 ($425,840.00) ($1,213,576.00)

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) 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 balances, 1/1/x1 Cash balance, 3/31/x1

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6. Analysis of short-term financing needs:

Projected cash balance as of December 31, 20x0 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 $35,000.00 $25,000.00 $10,000.00 $15,000.00 $25,000.00 $125,000.00 ($100,000.00)

7.Prepare Intercoastal Electronics budgeted income statement for the first quarter of 20x1. (Ignore Income taxes)
Income Statement Revenue COGS Gross Margin Expenses: Sales salaries Advertising and promotion Administrative salaries Interest on bonds Property taxes Sales commissions Interest on bank loan Depreciation Total expenses: Net Income: $1,456,400.00 $1,019,480.00 $436,920.00

$63,000.00 $48,000.00 $63,000.00 $7,500.00 $2,700.00 $14,564.00 $2,500.00 $75,000.00 $276,264.00 $160,656.00

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8. Prepare Intercoastal Electronics budgeted statement of retained earnings for the first quarter of 20x1.
Retained Earnings Retained Earnings as of December Net Income Dividends Retained Earnings as of March $107,500.00 $160,656.00 ($50,000.00) $218,156.00

9. Prepare Intercoastal Electronics budgeted balance sheet as of March, 20x1.

Balance Sheet as of March 31st Cash Accounts receivable Marketable Securities Inventory Buildings and Equipment Total Assets Accounts payable Bond interest payable property taxes payable Bonds payable (10% Due in 20x6) Common Stock Retained Earnings Total Liabilities and Stockholder's Equity $25,954.00 $359,370.00 $0.00 $186,340.00 $676,000.00 $1,247,664.00 $223,608.00 $5,000.00 $900.00 $300,000.00 $500,000.00 $218,156.00 $1,247,664.00