Atlantico: Budgeting
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Atlantico, Inc. is a small, rapidly growing wholesaler of consumer electronic products. Product lines
are small kitchen appliances and power tools. The firm's general manager recently completed a
sales forecast. The general manager believes the company's sales during the first quarter of 2005
will increase by 10 percent each month over the previous month's sales. Then, the general manager
expects sales to remain constant for several months. Atlantico's projected balance sheet as of
December 31, 2004, is as follows:
Assets
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
Liabilities and equity
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
The assistant controller is now preparing a monthly budget for the first quarter of 2005. In the
process, the following information has been accumulated:
1. Projected sales for December 2004 are $500,000. Credit sales typically are 75% of total sales.
Atlantico's credit experience indicates that 15 percent of the credit sales are collected during
the month of the 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. The assistant controller 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
Also, sales commissions run at the rate of 1 percent of sales
4. Atlantico's president 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, the president believes that Atlantico should 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. The president believes that short-term interest rates will be 10 percent per
year at the time of the equipment purchases. IF a loan is necessary, the president 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 sixmonth
period.
8. REQUIRED:
a. Sales budget
b. Cash receipts budget
c. Purchases budget
d. Cash disbursements budget
e. Summary cash budget (You will need to do part (f) before completing the summary cash
budget.)
f. Analysis of short-term financing needs
g. Prepare Atlantico's budgeted income statement for the first quarter of 2005. (ignore
income taxes)
h. Prepare Atlantico's budgeted statement of retained earnings for the first quarter of 2005.
i. Prepare Atlantico's budgeted balance sheet as of March 31, 2005.
Write a 700-1,050-word report summarizing Atlantico's budgeting process and the purpose of
budgeting in general. What recommendations do you have to improve the Atlantico budgeting
process? Discuss any organizational strengths and weaknesses that may be revealed through
Atlantico's master budgeting process and give your recommendations for improvements.
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Atlantico, Inc. is a small, rapidly growing wholesaler of consumer electronic products. Product lines
are small kitchen appliances and power tools. The firm's general manager recently completed a
sales forecast. The general manager believes the company's sales during the first quarter of 2005
will increase by 10 percent each month over the previous month's sales. Then, the general manager
expects sales to remain constant for several months. Atlantico's projected balance sheet as of
December 31, 2004, is as follows:
Assets
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
Liabilities and equity
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
The assistant controller is now preparing a monthly budget for the first quarter of 2005. In the
process, the following information has been accumulated:
1. Projected sales for December 2004 are $500,000. Credit sales typically are 75% of total sales.
Atlantico's credit experience indicates that 15 percent of the credit sales are collected during
the month of the 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. The assistant controller 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
Also, sales commissions run at the rate of 1 percent of sales
4. Atlantico's president 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, the president believes that Atlantico should 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. The president believes that short-term interest rates will be 10 percent per
year at the time of the equipment purchases. IF a loan is necessary, the president 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 ...
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