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 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, Victoria Kite is beginning just-in-time (JIT) deliveries from suppliers, which means that purchases equal expected sales.
On January 1, purchases 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 thereafter. Bad debts are negligible.
Monthly operating expenses are as follows:
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Wages and Salaries $15,000
Insurance expired $125
Depreciation $250
Miscellaneous $2,500
Rent @250/month + 10% of quarterly sales over $10,000
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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 principle is repaid. Assume that borrowing 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.
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
$70,550
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Liabilities as of December 31, 2004
Accounts payable (Merchandise) $35,550
Dividends payable $1,500
Rent payable $7,800
$44,850
· November 30 inventory balance = $16,000.
Recent and forecasted sales:
October …$38,000 December…$25,000 February…$75,000
April…$45,000 November….$25,000 January …..$62,000 March….$38,000
Prepare Master Budget
1. Prepare a master budget including a budgeted income statement, balance sheet, statement of cash receipts and disbursements, and supporting schedules for the months of January through 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.
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Explain why there is a need for a bank loan and what operating sources provide the cash for the repayment of the bank loan.
Explain why there is a need for a bank loan and what operating sources provide cash for the repayment of the bank loan
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There is a need for a bank loan because Victoria Kite Company wants to maintain a minimum ending cash balance of $5,000 each month. However, based on the projected sales and expenses, it is expected that the company's cash balance will fall below $5,000 in some months. To avoid this, the company needs additional cash to cover the shortfall.
The operating sources that provide the cash for the repayment of the bank loan are the cash receipts from sales and the cash disbursements for operating expenses. When the company makes sales, it receives cash from its customers, which can be used to repay the bank loan. Additionally, when the company pays its operating expenses, it frees up cash that can be used for loan repayment. By carefully managing its cash inflows and outflows, Victoria Kite Company can generate enough cash to repay the bank loan.