Question

AudioFile Products Ltd. is a retailer that sells sound systems. The company is planning its cash needs for the month of January, 2018. In the past, AudioFile has had to borrow money during the post-Christmas season to offset a significant decline in sales. The following information has been assembled to assist in preparing a cash flow forecast for January.

January 2018 Forecasted Income Statement

Sales		$200,000
Cost of goods sold		150,000
Gross profit		50,000
Variable selling expenses	$10,000
Fixed administrative expenses	20,000	30,000
Forecasted net operating income		$ 20,000

(1)	Sales are 10% for cash and 90% on credit.
(2)	Credit sales are collected over a three-month period with 40% collected in the month of sale, 30% in the following month, and 20% in the second month following sale. November 2017 sales totaled $300,000 and December 2017 sales totaled $500,000.
(3)	40% of a month’s inventory purchases are paid for in the same month. The remaining 60% are paid in the following month. Accounts payable relate solely to inventory purchases. At December 31, these totaled $400,000.
(4)	The company maintains its ending inventory levels at 60% of the cost of the merchandise to be sold in the following month. The merchandise inventory at December 31, 2017 was $90,000. February 2018 sales are budgeted at $150,000. Gross profit percentage is expected to remain unchanged.
(5)	The company pays a $10,000 monthly cash dividend to shareholders.
(6)	The cash balance at December 31, 2017 was $30,000; the company must maintain a cash balance of at least this amount at the end of each month.
(7)	The company can borrow on its operating loan in increments of $10,000 at the beginning of each month, up to a total loan balance of $500,000. The interest rate on this loan is 1% per month payable in the month following the loan. There is no operating loan at December 31, 2017.

Required:

Prepare a Cash Flow Forecast for AudioFile for the month of January 2018. Include appropriate supporting schedules. Refer to Problem 3-2 on page 127 of Selected Topics in Management Accounting keeping in mind that AudioFile has been in business for awhile and the operating budget worksheet is not required.

Answer 1

Cash flow forecast for Audio File for the month of January 2018

Particulars	Amount
Beginning cash balance	$30000
Cash Receipts :
Sales :
January-cash ($200000 * 10%)	20000
January -credit ($200000 * 40%)	80000
November ($300000 * 20%)	60000
December ($500000 * 30%)	150000
Total cash recipts	$310000
Cash payments :
Purchase	451000
Cash dividends	10000
Total payments	461000
Cash decrease	($121000)
Required cash balance	30000
Operating loan	160000
Ending cash balance	$39000