Question

AudioFile Products Ltd. is a retailer that sells sound systems. The company is planning its cash...

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.

Business   Accounting   
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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
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