Question:
AudioFile Products Ltd. is a retailer that sells sound systems. The company is planning its cash needs for the month of January, 2017. 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.
a. January 2017 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 |
| Net income |
|
$20,000 |
b. Sales are 10% for cash and 90% on credit.
c. 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. 10% of credit sales are never collected. November 2016 sales totaled $300,000 and December sales totaled $500,000.
d. 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, accounts payable totaled $400,000.
e. 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, 2016 was $90,000. February 2017 sales are budgeted at $150,000. Gross profit percentage is expected to remain unchanged.
f. The company pays $10,000 monthly cash dividends to shareholders.
g. The cash balance at December 31, 2016 was $30,000; the company must maintain a cash balance of at least this amount at the end of each month.
h. 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 on the first day of the next month. There is no operating loan at December 31, 2016.
Required: Prepare a cash flow forecast for AudioFile for the month of January 2017. Include appropriate supporting schedules.