Glow, Inc. is interested in purchasing some new manufacturing equipment right af
ID: 2424772 • Letter: G
Question
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 receivable 312,000
Marketable securities 30,000
Inventory 261,625
Buildings and equipment (net of accumulated depreciation) 1,298,519
Total assets $1,962,144
Accounts payable $366,844
Bond interest payable 12,500
Property taxes payable 4,800
Bonds payable (10%; due in 2020) 600,000
Common stock 750,000
Retained earnings 228,000
Total liabilities and stockholders' 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).
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.)
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
$
Explanation / Answer
Master budget for I Qtr 2016 Jan Feb March $ Opening cash balance D 211202 329401 1) cash Collection A 760500 814775 936991 2512266 Less: 2) Less cash Disubursements B 481873 583587 658150 1723611 3) cash Expenses C: Sales salaries 20000 20000 20000 60000 Advertising & Promotion 25000 25000 25000 75000 Administrative Salaries 35000 35000 35000 105000 Interest On Bonds 15000 0 0 15000 Property Taxes 7200 7200 Sales Commissions 22425 25789 29657 77871 Divedend Paid 100000 4.) 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 Cash available A+D-B-C +E 211202 329401 398584 Repayment of short term borrowings -235000 Interest paid -4700 Cash Balance as on 31 March 2015 158884 Note 1Cash collection Jan Feb Mar Total Sales in units A 747500 859625 988568.8 2595694 40% is cash salemonth 299000 343850 395427.5 1557416 20% in same month 149500 171925 197713.8 1038278 40% in next month 312000 299000 343850 954850 Total A 760500 814775 936991.3 2512266 Accounts Receivable as on 31 march 988569*.4 395427.6 Note 2 Cash Disbursement Jan Feb Mar Total Beginning Inventory 261625 300869 345999 908493 Purchases B 562493.75 646868 691998 1901360 Closing Inventory 50% of next month COGS 300868.75 345999 345999 992866.9 as from April sales is constant Sales 747500 859625 988569 2595694 COGS 523250 601738 691998 1816986 COGS=Beginning Inventory+purchases-Closing Inventory COGS-Beginning Inventory+Closing Inventory=Purchases 562493.75 646867.8 691998.1 Cash Disbursement 25% same month B*.5 140623.4375 161717 172999.5 475339.9 75% in next month 341250 421870.3 485150.9 1248271 Total B 481873.4375 583587.3 658150.4 1723611 Accounts payable as on 30 Sept 737128.4*.75 552846.3 Cash Expenses Sales salaries 20000 20000 20000 60000 Advertising & Promotion 25000 25000 25000 75000 Administrative Salaries 35000 35000 35000 105000 Interest On Bonds 15000 0 0 15000 Property Taxes 7200 7200 Sales Commissions 22425 25788.75 29657.06 77870.81 Divedend Paid 100000 Total C 117425 112988.8 209657.1 Cash Available A-B-C 161201.5625 118199 69183.8 Income Statement as on 31 march 2016 Sales 2595694 Cost of Good Sold -1816986 Gross Margin 778708 Expenses Sales salaries 60000 Advertising & Promotion 75000 Administrative Salaries 105000 Interest On Bonds 7500 Property Taxes 3600 Sales Commissions 77871 Depreciation 45000 Interest On Short Term Loan 4700 Net Operating Income 400037.3 Statement of Retained earnings Opening balance 228000 Add: Net Income for the year 400037 Less: Dividend Paid 100000 Closing balance 528037 BalANCE Sheet as on 31 March 2016 Assets Cash 158884 Accounts Receivable 395428 Inventory 345999 Plant & Equipment 1573519 Less: Accumulated Depreciation -45000 2428830 Liabilities Accounts payable 552846 Bond Interest Payable 2 months 5000 Preperty Taxes Payable for 1 months 1200 Bonds Payable 600000 Common Stock 750000 Retained earnings 528037 TotalLiabilities & Equity 2437084 -8253.61
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