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# Preparing a cash flow forecast given journal entries

QUESTION 1:

KK Products Ltd. is a retailer that sells sound systems. The company is planning its cash needs for the month of January, 2013. In the past, KK 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.
a. January 2013 forecasted income statement:
Sales \$200,000
Cost of goods sold 150,000
Gross profit 50,000
Variable selling expenses \$10,000
Forecast net operating income \$ 20,000

b. Sales are 10% for cash and 90% on credit.
c. 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. November 2012 sales totaled \$300,000 and December sales totaled \$500,000.
d. 40% of a month's inventory purchases are paid for in the same month. The remaining 60% are paid in the following month. Accounts payable relate solely to inventory purchases. At December 31, these totaled \$400,000.
e. 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, 2012 was \$90,000. February 2013 sales are budgeted at \$150,000. Gross profit percentage is expected to remain unchanged.
f. The company pays a \$10,000 monthly cash dividend to shareholders.
g. 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.
h. The company can borrow on its operating loan in increments of \$10,000 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, 2012.

Required: Prepare a Cash Flow Forecast for KK for the month of January 2013. Include appropriate supporting schedules.

#### Solution Preview

KK Products Ltd.

Schedule 1: Cash collections

Cash sales: 10% of Jan [\$200,000 * 10%] \$20,000
Credit sales collection:
40% of Jan [\$200,000*90%*40%] \$72,000
30% of Dec [\$500,000*90%*30%] \$135,000
20% of Nov [\$300,000*90%*20%] \$54,000

Total expected cash collections for January \$281,000

Schedule 2: Cash disbursements to suppliers

Step 1: Determination of gross profit percentage & Cost of goods sold for February

Gross profit % = Gross profit/Sales = 50,000/200,000 ==> 25%
If gross profit % is 25%, cost of goods sold % is 75% of sales (100% - 25%).
Cost of goods sold for February = \$150,000 * 75% ==> \$112,500

Step 2: Determination of ...

#### Solution Summary

The cash flow forecast given journal entries for preparing are given. The foretasted income statement are provided.

\$2.19