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 short-term loan down at MetroBank. This statement by Beth Davies-Lowry, president of Intercoastal Electronics Company, concluded a meeting she had called with the firms top management. Intercoastal is a small, rapidly growing wholesaler of consumer electronic products. The firms main product lines are small kitchen appliances and power tools. Marcia Wilcox, Intercoastals General Manager of Marketing, has recently completed a sales forecast. She believes the companys sales during the first quarter of 20x1 will increase by 10 percent each month over the previous months sales. Then Wilcox expects sales to remain constant for several months. Intercoastals projected balance sheet as of December 31, 20x0, is as follows: Cash .................................................................................................................................................. $ 35,000Accounts receivable ............................................................................................................................ 270,000Marketable securities .......................................................................................................................... 15,000Inventory ............................................................................................................................................ 154,000Buildings and equipment (net of accumulated depreciation) ................................................................... 626,000Total assets ........................................................................................................................................$1,100,000Accounts payable ................................................................................................................................ $ 176,400Bond interest payable .......................................................................................................................... 12,500Property taxes payable ........................................................................................................................ 3,600Bonds payable (10%; due in 20x6) ....................................................................................................... 300,000Common stock ................................................................................................................................... 500,000Retained earnings ............................................................................................................................... 107,500Total liabilities and stockholders equity ................................................................................................$1,100,000 Jack Hanson, 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 of 20x0 are $400,000. Credit sales typically are 75 percent of total sales. Intercoastals credit experience indicates that 10 percent of the credit sales are collected dur-ing the month of sale, and the remainder are collected during the following month. 2 . Intercoastals cost of goods sold generally runs at 70 percent of sales. Inventory is purchased on account, and 40 percent of each months purchases are paid during the month of purchase. The remainder is paid during the following month. In order 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 months projected cost of goods sold. 3 . Hanson has estimated that Intercoastals other monthly expenses will be as follows:Sales salaries .............................................................................................................................................. $21,000Advertising and promotion ............................................................................................................................ 16,000Administrative salaries ................................................................................................................................. 21,000Depreciation ................................................................................................................................................ 25,000Interest on bonds ......................................................................................................................................... 2,500Property taxes .............................................................................................................................................. 900 In addition, sales commissions run at the rate of 1 percent of sales. Confirming Pages396 Chapter 9 Profit Planning and Activity-Based Budgeting 4 . Intercoastals president, Davies-Lowry, has indicated that the firm should invest $125,000 in an automated inventory-handling system to control the movement of inventory in the firms ware-house just after the new year begins. These equipment purchases will be financed primarily from the firms cash and marketable securities. However, Davies-Lowry believes that Intercoastal needs to keep a minimum cash balance of $25,000. If necessary, the remainder of the equipment pur-chases will be financed using short-term credit from a local bank. The minimum period for such a loan is three months. Hanson believes short-term interest rates will be 10 percent per year at the time of the equipment purchases. If a loan is necessary, Davies-Lowry has decided it should be paid off by the end of the first quarter if possible. 5 . Intercoastals board of directors has indicated an 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 Inter-coastals 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. Required: Prepare Intercoastal Electronics Companys master budget for the first quarter of 20x1 by completing the following schedules and statements. 1 . Sales budget: 20x020x1December January February March 1st QuarterTotal sales .................................................Cash sales .................................................Sales on account ....................................... 2 . Cash receipts budget: 20x1January February March 1st QuarterCash sales ................................................................Cash collections from credit sales made during current month ...................................Cash collections from credit sales made during preceding month ...............................Total cash receipts .................................................... 3 . Purchases budget: 20x020x1December January February March 1st QuarterBudgeted cost of goods sold .....................................Add: Desired ending inventory ............................Total goods needed ............................Less: Expected beginning inventory ........................Purchases .........................................hiL10912_ch09_346-403.indd 3967/19/10 10:37 PM

Confirming Pages Chapter 9 Profit Planning and Activity-Based Budgeting 395 Required: 1 . Describe the role of budgeting in a firms strategic planning. 2 . For each of the financial objectives established by the board of directors and the president of Healthful Foods Inc., determine whether John Winslows budget attains these objectives. Support your conclusion in each case by presenting appropriate calculations, and use the following format for your answer. Objective Attained/Not AttainedCalculations 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 short-term loan down at MetroBank. This statement by Beth Davies-Lowry, president of Intercoastal Electronics Company, concluded a meeting she had called with the firms top management. Intercoastal is a small, rapidly growing wholesaler of consumer electronic products. The firms main product lines are small kitchen appliances and power tools. Marcia Wilcox, Intercoastals General Manager of Marketing, has recently completed a sales forecast. She believes the companys sales during the first quarter of 20x1 will increase by 10 percent each month over the previous months sales. Then Wilcox expects sales to remain constant for several months. Intercoastals projected balance sheet as of December 31, 20x0, is as follows: Cash .................................................................................................................................................. $ 35,000Accounts receivable ............................................................................................................................ 270,000Marketable securities .......................................................................................................................... 15,000Inventory ............................................................................................................................................ 154,000Buildings and equipment (net of accumulated depreciation) ................................................................... 626,000Total assets ........................................................................................................................................$1,100,000Accounts payable ................................................................................................................................ $ 176,400Bond interest payable .......................................................................................................................... 12,500Property taxes payable ........................................................................................................................ 3,600Bonds payable (10%; due in 20x6) ....................................................................................................... 300,000Common stock ................................................................................................................................... 500,000Retained earnings ............................................................................................................................... 107,500Total liabilities and stockholders equity ................................................................................................$1,100,000 Jack Hanson, 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 of 20x0 are $400,000. Credit sales typically are 75 percent of total sales. Intercoastals credit experience indicates that 10 percent of the credit sales are collected dur-ing the month of sale, and the remainder are collected during the following month. 2 . Intercoastals cost of goods sold generally runs at 70 percent of sales. Inventory is purchased on account, and 40 percent of each months purchases are paid during the month of purchase. The remainder is paid during the following month. In order 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 months projected cost of goods sold. 3 . Hanson has estimated that Intercoastals other monthly expenses will be as follows:Sales salaries .............................................................................................................................................. $21,000Advertising and promotion ............................................................................................................................ 16,000Administrative salaries ................................................................................................................................. 21,000Depreciation ................................................................................................................................................ 25,000Interest on bonds ......................................................................................................................................... 2,500Property taxes .............................................................................................................................................. 900 In addition, sales commissions run at the rate of 1 percent of sales. Problem 945 Comprehensive Master Budget; Borrowing; Acquisition of Automated Material-Handling System (LO 1, 2, 4) 2. Total cash receipts, first quarter: $1,367,0304. Total cash disbursements, first quarter: $1,213,5766. Required short-term borrowing: $(100,000)7. Net income: $160,656hiL10912_ch09_346-403.indd 3957/19/10 10:37 PM 4 . Intercoastals president, Davies-Lowry, has indicated that the firm should invest $125,000 in an automated inventory-handling system to control the movement of inventory in the firms ware-house just after the new year begins. These equipment purchases will be financed primarily from the firms cash and marketable securities. However, Davies-Lowry believes that Intercoastal needs to keep a minimum cash balance of $25,000. If necessary, the remainder of the equipment pur-chases will be financed using short-term credit from a local bank. The minimum period for such a loan is three months. Hanson believes short-term interest rates will be 10 percent per year at the time of the equipment purchases. If a loan is necessary, Davies-Lowry has decided it should be paid off by the end of the first quarter if possible. 5 . Intercoastals board of directors has indicated an 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 Inter-coastals 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. Required: Prepare Intercoastal Electronics Companys master budget for the first quarter of 20x1 by completing the following schedules and statements. 1 . Sales budget: 20x020x1December January February March 1st QuarterTotal sales .................................................Cash sales .................................................Sales on account ....................................... 2 . Cash receipts budget: 20x1January February March 1st QuarterCash sales ................................................................Cash collections from credit sales made during current month ...................................Cash collections from credit sales made during preceding month ...............................Total cash receipts .................................................... 3 . Purchases budget: 20x020x1December January February March 1st QuarterBudgeted cost of goods sold .....................................Add: Desired ending inventory ............................Total goods needed ............................Less: Expected beginning inventory ........................Purchases .........................................