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Company "A" a retailer that sells music systems. The company is planning its cash needs for the month of January, 2014. In the past, company has had to borrow money during the post-Christmas season to offset a significant decline in sales. The following information has been assembled to prepare a cash flow forecast for January.
January 2014 forecasted income statement:
Sales $400,000
Cost of goods sold 300,000
Gross profit 100,000
Variable selling expenses $10,000
Fixed administrative expenses 80,000 90,000
Forecast net operating income $ 10,000
Sales are 10% for cash and 90% on credit.
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. The remainder is never collected. November 2013 sales totaled $300,000 and December sales totaled $500,000.
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, 2013 was $180,000. February 2014 sales are budgeted at $200,000. Gross profit percentage is expected to remain unchanged.
40% of a month's inventory purchases are paid 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 $135,000.
The company pays a $10,000 monthly cash dividend to shareholders.
The cash balance at December 31, 2013 was $30,000; the company must maintain a cash balance of at least this amount at the end of each month.
Fixed administrative expenses include depreciation expense of $2,000 per month.
The company can borrow on its operating loan in increments of $1,000 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, 2013.
Required: Calculate the amount that will need to be borrowed in January 2014. Required with calculations
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