Reference no: EM13581066

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.

1. 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

1. Sales are 10% for cash and 90% on credit.

2. 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.

3. 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.

4. 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.

5. The company pays a $10,000 monthly cash dividend to shareholders.

6. 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.

7. Fixed administrative expenses include depreciation expense of $2,000 per month.

8. 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