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Atlantico, Inc: Prepare a Comprehensive Master Budget

Atlantico, Inc., is a small, rapidly growing wholesaler of consumer electronic products. The firm's main product lines are small kitchen appliances and power tools. Malinda Alexander, Atlantico's general manager of marketing, recently completed a sales forecast.

She believes the company's sales during the first quarter of 20x1 will increase by 10 percent each month over the previous month's sales. Then Alexander expects sales to remain constant for several months. Atlantico's projected balance sheet as of December 31, 20x0, is as follows:

Cash ................................................................................................... $ 29,000
Accounts receivable ............................................................................... 276,000
Marketable securities................................................................................ 15,000
Inventory ............................................................................................. 154,000
Buildings and equipment (net of accumulated depreciation) ....................... 626,000
Total assets....................................................................................... $1,100,000
Accounts payable................................................................................ $ 176,400
Bond interest payable............................................................................... 12,500
Property taxes payable.............................................................................. 3,600
Bonds payable (10%; due in 20x6) ......................................................... 300,000
Common stock ...................................................................................... 500,000
Retained earnings ................................................................................. 107,500
Total liabilities and stockholders' equity ............................................... $1,100,000

Shawn Garrity, the assistant controller, is now preparing a monthly budget for the first quarter of 20x1. In the process, the following information has been accumulated:

1. Projected sales for December 20x0 are $400,000. Credit sales typically are 75 percent of total sales. Atlantico's credit experience indicates that 10 percent of the credit sales is collected during the month of sale, and the remainder is collected during the following month.

2. Atlantico's cost of goods sold generally is 70 percent of sales. Inventory is purchased on account, and 40 percent of each month's purchases are paid during the month of purchase. The remainder is paid during the following month. To have adequate stocks of inventory on hand, the firm attempts to have inventory at the end of each month equal to half of the next month's projected cost of goods sold.

3. Garrity has estimated that Atlantico's other monthly expenses will be as follows:
Sales salaries.............................................................................. $21,000
Advertising and promotion............................................................. 16,000
Administrative salaries .................................................................. 21,000
Depreciation ................................................................................ 25,000
Interest on bonds .......................................................................... 2,500
Property taxes ................................................................................ 900
In addition, sales commissions run at the rate of 1 percent of sales.

4. Atlantico's president, Carrie Howland, has indicated that the firm should invest $125,000 in an automated inventory-handling system to control the movement of inventory in the firm's warehouse just after the new year begins. This equipment purchase will be financed primarily from the firm's cash and marketable securities. However, Howland believes that Atlantico needs to keep a minimum cash balance of $19,000. If necessary, the remainder of the equipment purchases will be financed using short-term credit from a local bank. The minimum period for such a loan is three months. Garrity believes that short-term interest rates will be 10 percent per year at the time of the equipment purchases. If a loan is necessary, Howland has decided it should be paid off by the end of the first quarter if possible.

5. Atlantico's board of directors has indicated its intention to declare and pay dividends of $50,000 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 Atlantico'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.

Prepare Atlantico's master budget for the first quarter of 20x1 by completing the following schedules and statements.

a. Sales budget:
__20x0__ ____________20x1_____________
December January February March 1st Quarter
Total sales............................
Cash sales...........................
Sales on account.................

b. Cash receipts budget:
____________20x1_____________
January February March 1st Quarter
Cash sales .............................................
Cash collections from credit sales.
made during current month ................
Cash collections from credit sales
made during preceding month...........
Total cash receipts..................................

c. Purchases budget:
__20x0__ __________ 20x1_______________
December January February March 1st Quarter
Budgeted cost of
goods sold.......................
Add: Desired
ending inventory...............
Total goods needed...................
Less: Expected beginning
inventory ........................
Purchases ...............................

d. Cash disbursements budget:
____________20x1_____________
January February March 1st Quarter
Inventory purchases:
Cash payments for purchases
during the current month* ....................
Cash payments for purchases during
the preceding monthâ?  ..........................
Total cash payments for
inventory purchases.............................

Other expenses:
Sales salaries ........................................
Advertising and promotion.......................
Administrative salaries ...........................
Interest on bondsâ?¡ .................................
Property taxesâ?¡......................................
Sales commissions..................................
Total cash payments for
other expenses....................................
Total cash disbursements.........................

*40% of the month's purchases (schedule c).
â? 60% of the prior month's purchases (schedule c).
â?¡Bond interest is paid every six months, on January 31 and July 31. Property taxes also are paid every six months, on
February 28 and August 31.

e. Complete the first three lines of the summary cash budget. Then do the analysis of short-term financing needs in requirement (f). Then finish requirement (e).

Summary cash budget:
___________20x1______________
January February March 1st Quarter
Cash receipts (from schedule b).....................
Less: Cash disbursements
(from schedule d) ......................................
Change in cash balance during
period due to operations ............................
Sale of marketable securities (1/2/x1) ............
Proceeds from bank loan (1/2/x1) ..................
Purchase of equipment..................................
Repayment of bank loan (3/31/x1) ................
Interest on bank loan ...................................
Payment of dividends ...................................
Change in cash balance during
first quarter ..............................................
Cash balance, 1/1/x1 ...................................
Cash balance, 3/31/x1 .................................

f. Analysis of short-term financing needs:

Projected cash balance as of December 31, 20x0 .............................. $
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......................................................... $______

g. Prepare Atlantico's budgeted income statement for the first quarter of 20x1. (Ignore incometaxes.)

h. Prepare Atlantico's budgeted statement of retained earnings for the first quarter of 20x1.

i. Prepare Atlantico's budgeted balance sheet as of March 31, 20x1.
(Hint: On March 31, 20x1,Bond Interest Payable is $5,000 and Property Taxes Payable is $900.)

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The solution presents a detailed master budget with supporting schedules.

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