2. [-/5 Points] DETAILS Question 2: Cash inflows from sales Budgeted sales are: Month Sales revenue August $10,000 September $14,000 October $18,000 November $12,000 December $17,000 MY NOTES ASK YOUR TEACHER PRACTICE ANOTHER You collect 50% of sales revenue as cash in the month of the sale, 40% in the following month, and 10% two months after the sale. a) Compute budgeted cash inflows for October and November: October $ November = $ Remember to go backwards in time: e.g., 40% of September revenue is collected in the following month (October). This implies that cash inflows for October include 40% of sales from the previous month (September). b) According to the income statement, a firm is profitable in the current year. Can the firm run out of cash during the year? O NO YES What are some examples of how a firm could run out of cash? (select all that apply) Trick question: by definition, a profitable firm must have higher cash inflows than cash outflows. Rapid sales growth: A firm incurs many cash outflows in advance to generate sales (e.g., salaries, payments to suppliers), and it collects cash inflows from sales with a delay due to credit sales. To generate higher sales, the firm needs to increase cash outflows today, but the corresponding cash inflows will increase with a delay of a few months. The firm can run out of cash during this delay. Purchase of new equipment: If a firm buys major new equipment for cash, then it has a large cash outflow in the current year. Current year's income statement does not reflect this cash outflow (instead, this cash outflow will become annual depreciation expense in future income statements during the entire useful life of the equipment). c) A firm is about to run out of cash. What can it do to mitigate the cash shortage? (select all that apply) buy new equipment encourage customers to pay in cash (e.g., offer a discount for cash payment) postpone equipment purchases encourage customers to pay their bills early (e.g., offer a discount for early payment) postpone payments to suppliers borrow money repay bank loans early to reduce debt