Question

ABC CORP

BALANCE SHEET

December 31, 2010

                        Cash                                                            $   100

                        Marketable Securities                                          0

                        Accounts Receivables                                     2,000

                        Inventory                                                          140

                        Fixed Assets ( net )                                          2,000

                        Total Assets                                                    

                                                                                           =====

                        Accounts Payable                                             $ 2,380

                        Notes Payable                                                             0

                        Retained earnings                                                 ?

                        Common Stock                                                      1,400

                        Total of Both Liabilities & Equity                      =====

For the year ended 12/31/10 ABC CORP generated Sales of $12,000 and Net Income of $120. The net profit margin this year is considered normal by ABC CORP. Cost of Goods Sold was $8,400 in 2010. Cost of Goods Sold consistently averages seventy per cent of Sales, and will continue to do so in the future. Depreciation Expense was $500 in 2010. No Depreciation Expense was, or ever will, be included in Cost of Goods Sold. Fixed Operating Costs, excluding Depreciation Expense, were equal to $1,200 for 2010. These Fixed Operating Costs included all utilities, all insurance, all rent, all property taxes, and all labor charges. Fixed Operating Costs (other than depreciation expense) are paid for immediately, as they are incurred. Fixed Operating Costs were spread evenly throughout the year 2010. With regard to the size and timing of these costs, it is anticipated that the experience of 2010 will be repeated in 2011. Therefore, we anticipate cash payments associated with Fixed Operating Costs to equal $100 per month in 2011. Because of losses in recent years at ABC Corp and the loss carry forward provisions of the tax code there were no income taxes paid in 2010, and it is anticipated in 2011 that no income tax payments will be made.

Interest paid in 2010 was $40 and dividends paid in that same year were $60 Interest payments are made monthly and dividends are paid at the end of every quarter. The next dividend payment is scheduled for March 2011. The dividend payout ratio in 2010 is considered normal for ABC CORP. The annual interest rate for bank borrowing is six percent per year (one-half of one per cent per month). Interest paid in the current month is based on the previous month’s balance in Notes Payable.

The target cash balance for the end of any current month is equal to ten percent of next month’s sales.

Target ending inventory at the end of any current month is equal to twenty percent of estimated cost of goods sold for the next month. All purchases of inventory are paid for in the month following purchase. The entire balance of Accounts Payable, at any given point in time, represents the purchase of inventory which has not yet been paid for. One-half of all sales are collected in the month of sale, the remainder in the following Month. The sales forecast for the first four months of 2011 is

January                                                $1,000

February                                                   800

March                                                  3,200

April                                                     2,000

Sales for October, November and December of the year 2010 were $2,000 $2,000 and $4,000, respectively.

It is the policy of the company to repay bank borrowing as soon as possible; if money is not needed for this purpose, then investments of marketable securities are made. Marketable Securities should be liquidated to satisfy any subsequent need for cash flow before any new bank borrowing is done. The annual yield on marketable securities is three per cent (one-quarter of one percent per month). Interest payments to the firm are based on the previous month’s balance in Marketable Securities.

On the next two pages, you will find a partially completed Cash Budget. Some numbers are filled in for your convenience. For only the month of January 2011, you are to fill in missing amounts in this Cash Budget. When you answer to this requirement remember to write zero if you mean zero because a blank will not be interpreted as zero.

The Cash Budget
	Nov 10	Dec 10	Jan 11
Sales	$2,000	$4,000	$1,000
Cost of goods sold	1,400	2,800
Beginning Inventory	280	560
Ending Inventory	560	140
Purchases	1,680	2,380
Cash Collections:	X	X	X
Collected in month of sale	X	X
Collected month after sale	X	X
Other Inflow:	X	X
Interest Income Payments	X	X	0
TOTAL INFLOWS	X	X
Outflows:	X	X	X
Payment for Purchases	X	X
Interest Payments	X	X	0
Overhead Payments	X	X	100
Fixed Asset Additions	X	X	0
Dividend payments	X	X	0
Income Tax Payments	X	X	0
TOTAL OUTFLOWS	X	X
Inflow - Outflow	X	X
Beginning Cash	X	X
Desired (Ending) Cash	X	100
Cash Produced Over + or Under - Immediate Need	X	X
Loan Required	X	X
Loan Repaid	X	X
Loan balance	X	0
Securities Purchased	X	X
Securities Sold	X	X
Securities Balance	X	0

Answer 1

The Cash Budget
	Nov-10	Dec-10	Jan-11
Sales	$2,000	$4,000	$1,000		Explanation and calculations
Cost of goods sold	1,400	2,800	700
Beginning Inventory	280	560	140
Ending Inventory	560	140	112		cost of goods sold(COGS) for feb =	70% of 800	560
Purchases	1,680	2,380	672		ending inventory of Jan = 20 % of 560 =	112
Cash Collections:	X	X	X
Collected in month of sale	X	X	500		COGS = beginning inventory + purchases - ending inventory
Collected month after sale	X	X	2000		700= 140+ purchases -112
Other Inflow:	X	X			purchases= 700 +112 -140 =	672
Interest Income Payments	X	X	0
TOTAL INFLOWS	X	X	2500
Outflows:	X	X	X
Payment for Purchases	X	X	2380
Interest Payments	X	X	0
Overhead Payments	X	X	100
Fixed Asset Additions	X	X	0
Dividend payments	X	X	0
Income Tax Payments	X	X	0
TOTAL OUTFLOWS	X	X	2480
Inflow - Outflow	X	X	20		2500-2480
Beginning Cash	X	X	100
Desired (Ending) Cash	X	100	80		10 % of next months sale = 10 % 0f 800 =	80
Cash Produced Over + or Under - Immediate Need	X	X	40		100+20-80
Loan Required	X	X	0
Loan Repaid	X	X	0
Loan balance	X	0	0
Securities Purchased	X	X	40
Securities Sold	X	X	0
Securities Balance	X	0	40