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    Preparing a cash flow forecast given journal entries

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    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
    Fixed administrative expenses 20,000 30,000
    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.

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    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.