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    Victoria Kite Company, a small Melbourne firm that sells kites on the Web wants a master budget for the next three months, beginning January 1,2005. It desires and ending minimum cash balance of $5,000 each month. Sales are forecasted at an average wholesale selling price of $8 per kite. In January, Victoria Kite is beginning just-in-time (JIT) deliveries from suppliers, which means that purchases equal expected sales.
    On January 1, purchase will cease until inventory reaches $6,000, after which time purchases will equal sales. Merchandise costs average $4 per kite. Purchases during any given month are paid in full during the following month. All sales are on credit, payable within 30 days, but experience has shown that 60% of current sales are collected in the current month, 30% in the next month,and 10% in the month of thereafter. Bad debts are negligible.
    Monthly operating expenses are as follows:

    Wages and salaries $15,000
    Insurance expired 125
    Depreciation 250
    Miscellaneous 2,500
    Rent $250/month + 10% of quarterly
    sales over $10,000

    Cash dividends of $1,500 are to be paid quarterly, beginning January 15, and are declared on the fifteenth of the previous month. All operating expenses are paid as incurred, except insurance, depreciation, and rent. Rent of $250 is paid at the beginning of each month, and the additional 10% of sales is paid quarterly on the tenth of the month following the end of the quarter. The next settlement is due January 10.

    The company plans to buy some new fixtures for $3,000 cash in March. Money can be borrowed and repaid in multiples of $500 at an interest rate of 10% per annum. Management wants to minimize borrowing and repay rapidly. Interest is computed and paid when the principal is repaid. Assume that borrowing occurs at the beginning, and repayments at the end, of the months and question. Money is never borrowed at the beginning and repaid at the end of same month. Compute interest to the nearest dollar.

    Assets as of December 31,2004

    Cash -$5,000
    Accounts receivable -$12,500
    Inventory* -39,050
    Unexpired insurance -1,500
    Fixed assets, net -12,500
    totals $70,550

    Liabilities as of December 31,2004

    Accounts payable
    (merchandise) -$35,550
    Dividends payable -1,500
    Rent payable -7,800
    totals $44,850

    *November 30 inventory balance + $16,000

    Recent and forecasted sales:

    October 38,000 December 25,000 Feb$75,000 April $45,000
    November 25,000 Jan 62,000 March 38,000

    1. Prepare a master budget including a budget income statment, balance sheet,statement of cash receipts and disbursements, and supporting schedules for the months January through March 2005.

    2. Explain why there is need for bank loan and what operating sources provide the cash for the repayment of the bank loan.

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    This solution is comprised of a simple explanation of the steps involved in preparing a master budget