Comprehensive budget question: wholesaler Universal Electric Company is a small, rapidly growing wholesaler of consumer electrical product. 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 each of the months in 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 accumulated depreciation) .............................. 626 000

Total assets .................................................................................... $1 100 000

Accounts payable ............................................................................... $176400

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 $1100 000 .................................... $1 100000

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 sales. Universal's credit experience indicates that 10 per cent of the credit sales are collected u 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 are 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 month 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.

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

2. Cash receipts budget

3. Purchases budget

4. Cash payments budget

5. Complete the first three lines of the summary cash budget. Then do the analysis of short-term financing needs in requirement 6, and then finish requirement 5.

6 Analysis of short-term financial needs:
Projected cash balance as at 31 December in current year
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 Universal Electric's budgeted income statement for the first quarter. (Ignore income taxes.)
8. Prepare Universal Electric's budgeted statement of retained earnings for the first quarter.
9. Prepare Universal Electric's budgeted balance sheet as at 31 March?

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Sales Budget Next year Current year December March 1st quarter January February Total sales Cash sales Credit sales Cash Receipts Budget March 1st quarter January February Cash sales Cash receipts from credit sales made during current month Cash receipts from credit sales made during preceding month Total cash receipts