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
Activity 5.5 Case Study 5 9-45
Managerial Accounting Chapter 9

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 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, 20x10, is as follows:

INTERCOASTAL'S PROJECTED BALANCE SHEET

Cash $35,000.00
Accounts receivable $270,000.00
Marketable Securities $15,000.00
Inventory $154,000.00
Buildings and Equipment $626,000.00

Total Assets $1,100,000.00

Accounts payable $176,400.00

Bond interest payable $12,500.00
property taxes payable $3,600.00
Bonds payable (10% Due in 20x6) $300,000.00
Common Stock $500,000.00
Retained Earnings $107,500.00
Managerial Accounting Chapter 9

Total Liabilities and Stockholder's Equity $1,100,000.00

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:

$21,000.0
Sales salaries 0
$16,000.0
Advertising and promotion 0
$21,000.0
Administrative salaries 0
$25,000.0
Depreciation 0
Interest on bonds $2,500.00
Property taxes $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.
Managerial Accounting Chapter 9

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.

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
Decembe 1st
r January February March Quarter
$400,000 $440,000 $484,000 $532,400 $1,456,40
Total Sales .00 .00 .00 .00 0.00
$100,000 $110,000 $121,000 $133,100 $364,100.
Cash sales .00 .00 .00 .00 00
Sales on $300,000 $330,000 $363,000 $399,300 $1,092,30
account .00 .00 .00 .00 0.00

2. Cash Receipts budget:

2011
January February March 1st Quarter
$110,000.0 $121,000.0 $133,100.0
Cash sales 0 0 0 $364,100.00
Cash collections from
credit sales
made during current
month $33,000.00 $36,300.00 $39,930.00 $109,230.00
Cash collections from
credit sales
made during preceding $270,000.0 $297,000.0 $326,700.0
month 0 0 0 $893,700.00
$413,000.0 $454,300.0 $499,730.0 $1,367,030.0
Total cash receipts 0 0 0 0
Managerial Accounting Chapter 9

3. Purchases budget:

20x0 20x1
December January February March 1st Quarter
$280,000.0 $308,000.0 $338,800.0 $372,680.0 $1,019,480.0
Budgeted COGS 0 0 0 0 0
Add: Desired
$154,000.0 $169,400.0 $186,340.0 $186,340.0
ending inventory 0 0 0 0 $186,340.00
$434,000.0 $477,400.0 $525,140.0 $559,020.0 $1,205,820.0
Total goods needed 0 0 0 0 0
Less: Expected
beginning
$140,000.0 $154,000.0 $169,400.0 $186,340.0
Inventory 0 0 0 0 $154,000.00
$294,000.0 $323,400.0 $355,740.0 $372,680.0 $1,051,820.0
Purchases 0 0 0 0 0

4. Cash disbursements budget:

20x1
January February March 1st Quarter
Inventory purchases:
Cash payments for $129,360.0 $142,296.0 $149,072.0
purchases 0 0 0 $420,728.00
during the current month
Cash payments for
purchases
during the preceding $176,400.0 $194,040.0 $213,444.0
month 0 0 0 $583,884.00
Total cash payments for
inventory
$305,760.0 $336,336.0 $362,516.0 $1,004,612.0
purchases 0 0 0 0
Other expenses:
Sales salaries $21,000.00 $21,000.00 $21,000.00 $63,000.00
Advertising and promotion $16,000.00 $16,000.00 $16,000.00 $48,000.00
Administrative salaries $21,000.00 $21,000.00 $21,000.00 $63,000.00
Interest on bonds $15,000.00 $0.00 $0.00 $15,000.00
Property taxes $0.00 $5,400.00 $0.00 $5,400.00
Sales commissions $4,400.00 $4,840.00 $5,324.00 $14,564.00
Total cash payments for
other
expenses $77,400.00 $68,240.00 $63,324.00 $208,964.00
Managerial Accounting Chapter 9

$383,160.0 $404,576.0 $425,840.0 $1,213,576.0

Total cash disbursements 0 0 0 0

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.
20x1
January February March 1st Quarter
Cash receipts (from schedule $413,000.0 $454,300.0 $499,730.0 $1,367,030.0
2) 0 0 0 0
Less: Cash disbursements
($383,160. ($404,576. ($425,840. ($1,213,576.
(from schedule 4) 00) 00) 00) 00)
Change in cash balance
during
period due to operations $29,840.00 $49,724.00
Sale of marketable securities
(1/2/x1) $15,000.00
Proceeds from bank loan $100,000.0
(1/2/x1) 0
($125,000.
Purchase of equipment 00)
Repayment of bank loan ($100,000. ($100,000.00
(3/31/x1) 00) )
interest on bank loan ($2,500.00) ($2,500.00)
($50,000.0
payment of dividends 0) ($50,000.00)
Change in cash balance
during
first quarter ($9,046.00)
Cash balances, 1/1/x1 $35,000.00
Cash balance, 3/31/x1 $25,954.00
6. Analysis of short-term financing needs:

Projected cash balance as of December 31,

20x0 $35,000.00
Less: Minimum cash balance $25,000.00
Cash available for equipment purchases $10,000.00
Projected proceeds from sale of marketable
securities $15,000.00
Cash available $25,000.00
$125,000.0
Less: Cost of investment in equipment 0
($100,000.
Required short-term borrowing 00)
Managerial Accounting Chapter 9

7.Prepare Intercoastal Electronics budgeted income statement for the first

quarter of 20x1. (Ignore Income taxes)

Income Statement

$1,456,400
Revenue .00
$1,019,480
COGS .00

$436,920.0
Gross Margin 0

Expenses:
Sales salaries $63,000.00
Advertising and promotion $48,000.00
Administrative salaries $63,000.00
Interest on bonds $7,500.00
Property taxes $2,700.00
Sales commissions $14,564.00
Interest on bank loan $2,500.00
Depreciation $75,000.00

$276,264.0
Total expenses: 0

$160,656.0
Net Income: 0

8. Prepare Intercoastal Electronics budgeted statement of retained

earnings for the first quarter of 20x1.

Retained Earnings

$107,500.0
Retained Earnings as of December 0
$160,656.0
Net Income 0
Managerial Accounting Chapter 9

($50,000.0
Dividends 0)
$218,156.0
Retained Earnings as of March 0

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

20x1.

Balance Sheet as of March 31st

Cash $25,954.00
$359,370.0
Accounts receivable 0
Marketable Securities $0.00
$186,340.0
Inventory 0
$676,000.0
Buildings and Equipment 0

$1,247,664.
Total Assets 00

$223,608.0
Accounts payable 0
Bond interest payable $5,000.00
property taxes payable $900.00
$300,000.0
Bonds payable (10% Due in 20x6) 0
$500,000.0
Common Stock 0
$218,156.0
Retained Earnings 0

$1,247,664.
Total Liabilities and Stockholder's Equity 00