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 Accounts payable $176 400 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 inventoryhandling 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 isthree 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. Required: Prepare Universal’s annual budget for the first quarter of next year commencing 1 January by completing the following schedules and statements: 1. Sales budget Current Next year December January February March 1st quarter Total sales Cash sales Credit sales 2. Cash receipts budget Cash receipts budget January February March 1st quarter Cash sales Cash receipts from credit sales made during current month Cash receipts from credit sales made during preceding month Total cash receipts 3. Purchases budget Current year Next year December January February March 1st quarter Budgeted cost of goods sold Add Desired ending inventory Total goods needed Less Expected beginning inventory Purchases 4. Cash payments budget Cash payments budget January February March 1st quarter 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 long-term loan‡ Property taxes‡ Sales commissions Total cash payments for other expenses Total cash payments * 40% of the current month’s purchases (schedule 3). † 60% of the preceding month’s purchases (schedule 3). ‡ Long-term loan interest is paid every six months, on 31 January and 31 July. Property taxes are also paid every six months, on 28 February and 31 August.
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
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
Accounts payable $176 400
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 inventoryhandling 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 isthree 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.
Required:
Prepare Universal’s annual budget for the first quarter of next year commencing
1 January by completing the following schedules and statements:
1. Sales budget
Current Next year
December January February March 1st quarter
Total sales
Cash sales
Credit sales
2. Cash receipts budget
Cash receipts budget
January February March 1st quarter
Cash sales
Cash receipts from credit
sales made during
current month
Cash receipts from credit
sales made during
preceding month
Total cash receipts
3. Purchases budget
Current
year
Next year
December January February March 1st quarter
Budgeted cost of goods
sold
Add Desired ending
inventory
Total goods needed
Less Expected beginning
inventory
Purchases
4. Cash payments budget
Cash payments budget
January February March 1st quarter
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 long-term loan‡
Property taxes‡
Sales commissions
Total cash payments for
other expenses
Total cash payments
* 40% of the current month’s purchases (schedule 3).
† 60% of the preceding month’s purchases (schedule 3).
‡ Long-term loan interest is paid every six months, on 31 January and 31 July.
Property taxes are also paid every six months, on 28 February and 31 August.
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