Master Budget

The kite company sells kites on the web and needs a master budget for the next three months, beginning with Jan 1, 2005. It desires an ending minimum cash balance of $5,000 each month. Sales are forecasted at an average wholesale selling price of $8 per kite. In January the company is beginning just-in-time deliveries from suppliers, which means that purchases equal expected sales. On Jan 1,05 purchases will cease unitl inventory reaches $6,000, after which time purchases will equal sales. Merchandise costs average $4 per kite. Purchases during any given monith 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 monith, and 10%in the month thereafter. Bad debts are negligiable. Cash dividends of $1500 are to be paid quarterly, beg Jan 15, and are declared on the 15th 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 monith, and the additonal 10% of slaes is paid quarterly on the tenth of the month following the end of the quarter. The next settlement is due Jan 10. The company plans to buy some new fixtures for $3000 cash in March. Money can be borrowed and repaic in multiples of $500 at an interest rate of 10% per year. Management wants to minimize borrowing and repay rapidly. Interest is computed and paid when the principal is repaid. Assume that borrowning occurs at the beginning, and repayments at the end, of the months in question. Money is never borrowed at the beginning and repaid at the end of the same month. Compute interest to the nearest dollar.

1)prepare a master budget to include a budgeted income statement, balance sheet, statement of cash receipts and disbursements, and supporting schedules for the months Jan to March 2005.
2)Explain why there is a need for a bank loan and what operating sources provide the cash for the repayment of the bank loan.

Assets Liabilities
Cash $5000 Accounts payable
Accounts receivable $12,500 (merchandise) $35,550
Inventory $30,050 Dividends payable $1,500
Unexpired insurance $1,500 Rent payable $7,800
Fixed asset, net $12,500 Total liability $44,850
Total assets $70,550

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

Budgeted Sales
Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05
$38,000 $25,000 $25,000 $62,000 $75,000 $38,000 $45,000

Other Data
Required minimum cash balance $5,000 per month
Inventory needs to reach $6,000
Sales 60% during current month
30% in next month
10% in months thereafter
Cash dividends $1500 paid quarterly on the 15th
Rent paid at beginning of the month
Additionally 10% paid quarterly on sales over $10,000
Borrowing $3,000 cash in March
Or $500 a month with 10% interest per year

November 30 inventory balance = $16,000