Question

Atlantico, Inc., is a small, rapidly growing wholesaler of consumer electronic products.
product lines are small kitchen appliances and power tools. MaXXXXX XXXXXXXXX,
Atlantico’s general manager. The firm’s main of marketing, recently completed a sales
forecast. She believes the company’s sales during the first quarter of 20x1 will increase
by 10 percent each month over the previous month’s sales. Then Alexander expects
sales to remain constant for several months. Atlantico’s projected balance sheet as
of December 31, 20x0, is as follows:

Assets
Cash$29,000
Accounts receivable276,000
Marketable securities15,000
Inventory154,000
Buildings and equipment
(net of accumulated depreciation)626,000
Total assets$ 1,100,000

Liabilities and equity
Accounts payable$176,400
Bond interest payable12,500
Property taxes payable3,600
Bonds payable (10%; due in 20x6)300,000
Common stock500,000
Retained earnings107,500
Total liabilities and stockholders’ equity$ 1,100,000

Shawn Garrity, 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 20x0 are $400,000 . Credit sales typically are 75%
of total sales. Atlantico’s credit experience indicates that10 percent of the credit
sales is collected during the month of sale, and the remainder is collected during the
following month.

2. Atlantico’s cost of goods sold generally is 70 percent of sales. Inventory is purchased on account,
and 40 percent of each month’s purchases are paid during the month of purchase. The remainder
is paid during the following month. 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 month’s projected
cost of goods sold.

3. Garrity has estimated that Atlantico’s other monthly expenses will be as follows:
Sales salaries$21,000
Advertising and promotion16,000
Administrative salaries21,000
Depreciation25,000
Interest on bonds2,500
Property taxes900
Also, sales commissions run at the rate of 1 percent of sales.

4. Atlantico’s president, Ann Howland, has indicated that the firm should invest$125,000
in an automated inventory-handling system to control the movement of inventory in the
firm’s warehouse just after the new year begins. This equipment purchase will be financed
primarily from the firm’s cash and marketable securities. However, Howland believes that
Atlantico should keep a minimum cash balance of$19,000 If necessary, the remainder
of the equipment purchases will be financed using short-term credit from a local bank.
The minimum period for such a loan is three months. Garrity believes that short-term
interest rates will be 10 percent per year at the time of the equipment purchases.
If a loan is necessary, Howland has decided it should be paid off by the end of the first
quarter if possible.

5. Atlantico’s board has indicated its 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
Atlantico’s 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 Atlantico’s master budget for the first quarter of 20x1 by including the following schedules and
statements.
a. Sales budget:

b. Cash receipts budget:

c. Purchases budget:

d. Cash

e/f Cash budget. (Hint) You will need to do the analysis of short-term
financing needs in requirement (f) before completing the cash budget.
f. Analysis of short-term financing needs:

g. Prepare Atlantico’s budgeted income statement for the first quarter of 20x1. (Ignore income
taxes.)

h. Prepare Atlantico’s budgeted statement of retained earnings for the first quarter of 20x1.

i. Prepare Atlantico’s budgeted balance sheet as of March 31, 20x1.
Optional Information: Halifax, CanadaAlready Tried: All of it.

Edited by XXXXXXXX on 12/1/2005 at 2:18 PM