Questions:
1. Over the past several years the Programme Corporation has encountered difficulties estimating its cash flows. The result has been a rather strained relationship with its banker. Programme's controller would like to develop a means by which he can forecast the firm's monthly operating cash flows. The following data were gathered to facilitate the development of such a forecast.
1. Sales have been increased and are expected to increase at 0.5 percent each month.
2. Thirty percent of each month's sales are for cash; the other 70 percent are on open account.
3. Of the credit sales, 80 percent are collected in the first month following the sale and the remaining 20 percent are collected in the second month. There are no bad debts.
4. Gross margin on sales averages 25 percent.
5. Programme purchases enough inventory each month to cover the following month's sales.
6. All inventory purchases are paid for in the month of purchase at a 2 percent cash discount.
7. Monthly expenses are: payroll, $1,500; rent, $400; depreciation, $120; other cash expenses, 1percent of that month's sales. There are no accruals.
8. Ignore the effects of corporate income taxes, dividends, and equipment acquisitions. Using the data above, develop a mathematical model the controller can use for his calculations. Your model should be capable of calculating the monthly operating cash inflows and outflows for any specified month.
(CMA, adapted)