Question

Case Study #2 – Budgeting
Glow, Inc. is interested in purchasing some new manufacturingequipment right after the beginning of the new year. They wouldlike to finance the new equipment with cash and marketablesecurities, but if necessary they can get a short-term loan from alocal bank. You have been engaged to prepare a master budget forGlow, Inc. for the first quarter of 2016. Glow, Inc. is a small,rapidly growing manufacturer of lighting equipment. The company’smain product line is table lamps. The marketing manager hasrecently completed a sales forecast. She believes the company’ssales during the first quarter of 2016 will increase by 15 percenteach month over the previous month’s sales. Then sales are expectedto remain constant for several months. Glow Inc.’s projectedbalance sheet as of December 31, 2015 is as follows: Cash $ 60,000 Accountsreceivable 312,000 Marketablesecurities 30,000Inventory 261,625 Buildings and equipment (net of accumulateddepreciation) 1,298,519 Total assets $ 1,962,144 Accounts payable$ 366,844 Bondinterestpayable 12,500 Property taxespayable 4,800 Bonds payable (10%; due in2020) 600,000 Commonstock 750,000Retainedearnings 228,000 Total liabilities and stockholders' equity$ 1,962,144
The controller is now preparing a budget for the first quarter of2016. In the process, the following information has beenaccumulated: 1) Projected sales for December 2015 are $650,000.Credit sales are typically 60% of total sales. Glow, Inc.’s creditexperience indicates that 20% of credit sales are collected duringthe month of sale, and the remainder are collected during thefollowing month. 2) Glow, Inc.’s cost of goods sold generally runsat 70% of sales. Inventory is purchased on account and 25% of eachmonth’s purchases are paid during the month of purchase. Theremainder is paid during the following month. In order to haveadequate stocks of inventory on hand, the company attempts to haveinventory on hand at the end of each month equal to half of thenext month’s projected cost of goods sold. 3) The controller hasestimated that Glow Inc.’s other monthly expenses will be asfollows:
Sales salaries$ 20,000 Advertising andpromotion 25,000 Administrativesalaries 35,000Depreciation 15,000 Interest onbonds 2,500 Propertytaxes 1,200
In addition, sales commissions run at the rate of 3 percent ofsales and are paid in the same month as the sale.
4) The company president has indicated that the company shouldinvest $275,000 in state of the art manufacturing equipment justafter the new year begins. This equipment purchase will be financedprimarily from the company’s cash and marketable securities.However, the president believes the company needs to keep a minimumcash balance of $50,000. If necessary, the remainder of theequipment purchase will be financed using short-term credit from alocal bank. The minimum period for such a loan is three months. Thecurrent short-term interest rates are 8 percent per year and areexpected to remain at this rate through the time the equipment ispurchased. If a loan is necessary, the president has decided itshould be paid off by the end of the first quarter if possible. 5)Glow, Inc.’s board of directors has indicated an intention todeclare and pay dividends of $100,000 on the last day of eachquarter. 6) The interest on any short-term borrowing will be paidwhen the loan is repaid. Interest on Glow, Inc.’s bonds is paidsemiannually on January 31 and July 31 for the preceding six-monthperiod. 7) Property taxes are paid semiannually on February 28 andAugust 31 for the preceding six-month period.
Required: Prepare Glow, Inc.’s master budget for the first quarterof 2016 by completing the following schedules and statements. Roundall answers to the nearest dollar (do not include cents).
1) Sales budget: 2015 2016 December January February March 1stQuarter Total sales Cashsales Sales onaccount
2) Cash receipts budget: 2016 January February March 1st Quarter Cashsales Cash collections fromcredit sales made during currentmonth Cash collections fromcredit sales made during precedingmonth Total cashreceipts
3) Purchases budget: 2015 2016 December January February March 1stQuarter Budgeted cost of goodssold Add: Desired endinginventory Total goodsneeded Less: Expected beginninginventory Purchases
4) Cash disbursements budget: 2016 January February March 1st Quarter Inventorypurchases: Cash payments for purchases during the currentmonth Cash payments for purchases during the precedingmonth Total cash payments for inventorypurchases Otherexpenses: Salessalaries Advertising andpromotion Administrativesalaries Interest onbonds Propertytaxes Salescommissions Total cash payments for otherexpenses Total cashdisbursements
5) Complete the first three lines of the summary budget. Then dothe analysis of short-term financing needs in requirement (6). Usethis answer to help complete requirement (5).
Summary cash budget: 20x1 January February March 1st Quarter Cash receipts (sch2) Less: Cash disbursements(sch 4) Change in cash balanceduring period due to operations Sale of marketable securities(1/2/16) Proceeds from bankloan (1/2/16) Purchase ofequipment Repayment of bankloan (3/31/16) Interest on bankloan Payment ofdividends Change in cashbalance during first quarter XXXXX XXXXX XXXXX Cashbalance, 1/1/16 XXXXX XXXXX XXXXX Cash balance,3/31/16 XXXXX XXXXX XXXXX
6) Analysis of short-term financing needs: Projected cash balanceas of December 31, 2015 $ Less: minimum cash balance Cash available for equipment purchases $ Projected proceeds fromsale 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 firstquarter of 2016. (Ignore income taxes.)
8) Prepare Glow, Inc.’s budgeted statement of retained earnings forthe first quarter of 2016.
9) EXTRA CREDIT (5 points): Prepare Glow, Inc.’s budgeted balancesheet as of March 31, 2016. (Hint: On March 31, 2016, Bond InterestPayable is $5,000 and Property Taxes Payable is $1,200.)