Chapter 9 Financial Planning and Analysis

Chapter 9 Financial Planning and Analysis

Comprehensive Master

Budget; Borrowing;

Acquisition of Automated

Material-Handling System

(LB 9-2, 9-3, 9-5, 9-6)
1. Sales on account, first quarter: $2,184,600
3. Purchases: first quarter: $2,103,640
5. Cash receipts, first quarter: $2,734,060
7. Net income: $321,312

Chapter 9 Financial Planning and Analysis: The Master Budget

FiT-FOR-LIFE Focus INC.

BALANCE SHEET

20x14 20x5

actual Budgeted

Assets:

Cash ....................................................................................................... $ 20,000 $ 34,000

Accounts receivable .......................................................................................... 120,000 136,000

inventory .................................................... ............................. 600,000 730,000

Plant and equipment (net of accumulated depreciation) ....................................... 3,260,000 3,200,000

Total ............................................................................................................ $4,000,000 $4,100,000

Liabilities:

Accounts payable ............................................................................................. $ 220,000 $ 244,000

Long—term debt ..................... 640,000 616,000

Stockholders’ equity:

Common stock ............. 800,000 800,000

Retained earnings ...................................................................... 2,340,000 2,440,000

Total ............................................................................................................

$4,000,000 $4,100,000

The company paid dividends of $55,440 in 20x4, and the expected tax rate for 20x5 is 34 percent.

Required:

1. Describe the role of budgeting in a firm’s strategic planning.

2. For each of the financial objectives established by the board of directors and the president of Fit for Life Foods Inc. determine whether John Winslow’s budget attains these objectives. Support your conclusion in each case by presenting appropriate calculations, and use the following format for your answer.

Objective “tamed/Not Aflained Calculations

3. Explain why the adjustments contemplated by John Winslow are unethical, citing specific standards of ethical conduct for management accountants. '

(CMA, adapted)

“We really need to get this new material-handling equipment in operation just after the new year begins.

I hope we can finance it largely with cash and marketable securities, but if necessary we can get a shortterm loan down at MetroBank.” This statement by Beth Davies-Lowry, president of Global Electronics Company, concluded a meeting she had called with the firm’s top management. Global is a small, rapidly growing wholesaler of consumer electronic products. The firm’s main product lines are small kitchen appliances and power tools. Marcia Wilcox, Global Electronics’ general manager of marketing, has recently completed a sales forecast. She believes the company’s sales during the first quarter of 20xl will increase by 10 percent each month over the previous month’s sales. Then Wilcox expects sales to remain constant for several months. Global’s projected balance sheet as of December 31, 20x0 is as follows:

Cash .................................................................................................................................... $ 70,000

Accounts receivable ..................................................................................... 540,000

Marketable securities ........................................................................................ 30,000

inventory ..................................................................................................................... 308,000

Buildings and equipment (net of accumulated depreciation) ............................................................... 1,252,000

Total assets ........................... $2,200,000

Accounts payable ........................................................................................................ $ 352,800

Bond interest payable ................................................................................ , 25,000

Property taxes payable ............................................................................ 7,200

Bonds payable (10%; due in 20x6) .......................................................... . 600,000

Common stock ............................................................................................... 1,000,000

Retained earnings ........................................................................................................ 215,000

Total liabilities and stockholders‘ equity ........................................................................................... $2,200,000

Chapter 9

Jack Hanson, the assistant controller, is now preparing the monthly budget for the first quarter.

20xl. In the process, the following information has beenaccumulated.

Required:

Projected sales for December of 20x0 are $800.00} sales. Global’s credit experience indicates that 10 p; the month of sale, and the remainder are collected Global Electronics’ cost of goods sold generally on account, and 40 percent of each month’s purchased. The remainder is paid during the following month. On hand, the firm attempts to have inventory at the 6

month’s projected cost of goods sold.

Hanson has estimated that Global’s other monthly

Sales salaries ..........................................................................

Advertising and promotion ...................................................... .

Administrative salaries .............................................................

Depreciation .......................................................................... ,

interest on bonds .................................................................. .

Property taxes ..........................................................................

In addition, sales commissions run at the rate of l p Global Electronics’ president, Davies Lowry, has i: in an automated inventory handling system to cont! warehouse just after the new year begins. These from the firm’s cash and marketable securities. Needs to keep a minimum cash balance of $50,000. Purchases will be financed using short term such a loan is three months. Hanson believes short the time of the equipment purchases. If a loan is not paid off by the end of the first quarter if possible.

Global Electronics’ board of directors has indicated $100,000 on the last day of each quarter.

The interest on any short—term borrowing will be pm:

Electronics’ bonds is paid semiannually on January :

Property taxes are paid semiannually on February 2

period.

Prepare Global Electronics Company’s completing the following schedules and statements.

1.

Sales budget:

20x0

December Jam:

Total sales ...........................

Cash sales ................................

Sales on account ......................

Cash receipts budget:

Cash sales ...........................................................

Cash collections from credit sales

made during current month ..............................

Cash collections from credit sales

made during preceding month ..........................

Total cash receipts ...............................................

 
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