Lulu's Lemons Ltd. sells vehicles. The company is planning its cash needs for the month of January, 2015. In the past, Lulu's 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 2015 income statement:
Sales $500,000
Cost of goods sold 350,000
Gross profit 150,000
Variable selling expenses $25,000
Fixed administrative expenses 30,000 55,000
Forecast net operating income $95,000
Sales are 100% on credit.
Credit sales are collected over a three-month period: 30% is collected in the following month, 20% in the second month following sale, and 40% in the third month following sale. 10% of sales revenue is never collected. October 2014 sales totaled $600,000. November sales totaled $600,000 and December sales totaled $700,000.
100% of a month's inventory purchases are paid in the following month. Accounts payable relate solely to inventory purchases. At December 31, accounts payable totaled $422,500.
The company maintains its ending inventory levels at 150% of the cost of the merchandise to be sold in the following month. The merchandise inventory at December 31, 2014 was $525,000. February 2015 sales are budgeted at $400,000. Gross profit is expected to decline from the usual 30% to 25%.
The company pays $10,000 cash dividends to shareholders each month.
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.
The company can borrow and repay its operating loan in increments of $10,000 at the end of each month, up to a total loan balance of $500,000. The interest rate on this loan is 1/2% per month. The operating loan balance at December 31 is $50,000.
Required: Prepare a cash flow forecast for Lulu's for January 2015, formatted as in chapter 10 of the managerial accounting text. Include appropriate supporting schedules.