1. AudioFile Products Ltd. is a retailer that sells sound systems. The company is planning its cash needs for the month of January, 2013. 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 2013 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
Forecast net operating 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. November 2012 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, these 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, 2012 was $90,000. February 2013 sales are budgeted at $150,000. Gross profit percentage is expected to remain unchanged.
f. The company pays a $10,000 monthly cash dividend to shareholders.
g. The cash balance at December 31 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. There is no operating loan at December 31, 2012.
Required: Prepare a Cash Flow Forecast for AudioFile for the month of January 2013. Include appropriate supporting schedules.