Universal Electric Company is a small, rapidly growing wholesaler of consumer electrical products. The firm’s main product lines are small kitchen appliances and power tools. Marcia Wilcox, Universal’s general manager of marketing, has recently completed a sales forecast. She believes that the company’s sales during the first quarter of next year will increase by 10 per cent each month over the previous month’s sales. Wilcox then expects sales to remain constant for several months. Universal’s projected balance sheet as at 31 December this year is as follows:
Cash $ 35 000
Accounts receivable 270 000
Marketable securities 15 000
Inventory 154 000
Buildings and equipment (net of acc. depr.) 626 000
Total assets $1 100 000
Long-term loan interest payable 12 500
Property taxes payable 3 600
Long-term loan payable (10% p.a.) 300 000
Share capital 500 000
Retained earnings 107 500
Total liabilities and shareholders’ equity $1 100 000
Jack Hanson, the assistant accountant, is now preparing a monthly budget for the first quarter of next year. In the process, the following information has been accumulated:
Projected sales for December this year are $400 000. Credit sales typically are 75 per cent of total sales. Universal’s credit experience indicates that 10 per cent of the credit sales are collected during the month of sale, and the remainder are collected during the following month.
Universal’s cost of goods sold generally runs at 70 per cent of sales. Inventory is purchased on credit, and 40 per cent of each month’s purchases is paid during the month of purchase. The remainder is paid during the following month. In order to have adequate inventory on hand, the firm aims to have inventory at the end of each month equal to half of the next month’s projected cost of goods sold. Hanson has estimated that Universal’s other monthly expenses will be as follows:
Sales salaries $18 000
Advertising and promotion 19 000
Administrative salaries 21 000
Depreciation 25 000
Interest on long-term loan 2 500
Property taxes 900
In addition, sales commissions run at the rate of 1 per cent of sales.
Universal’s managing director, Beth Davies-Lowry, has indicated that the firm should, just after the new year begins, invest $125 000 in an automated inventory- handling system to control the movement of inventory in the firm’s warehouse. To the extent possible, these equipment purchases would be financed from the firm’s cash and marketable securities. Davies-Lowry believes that Universal needs to keep a minimum cash balance of $25 000. If necessary, the remainder of the equipment purchases would 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 5 per cent 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.
Universal’s board of directors has indicated an intention to declare and pay dividends of $50 000 on the last day of each quarter.
The interest on any short-term borrowing would be paid when the loan is repaid. Interest on Universal’s long-term loan is paid semi-annually, on 31 January and 31 July, for the preceding six-month period.
Property taxes are paid half-yearly on 28 February and 31 August for the preceding six-month period.
Prepare Universal’s annual budget for the first quarter of next year commencing 1 January by completing the following schedules and statements:
Cash receipts budget
January February March 1st quarter
Cash receipts from credit sales made during current month
Cash receipts from credit sales made during preceding month
Total cash receipts
Cash payments budget
January February March 1st quarter
Cash payments for purchases during the current month*
Cash payments for purchases during the preceding month†
Total cash payments for inventory purchases
Advertising and promotion
Interest on long-term loan‡
Total cash payments for other expenses
Total cash payments