Comprehensive Problem

18-12. Rose Sayer, a financial analyst of Fit-and-Forget Fittings Company, is trying to develop a cash budget for each month of 2016. The sales are expected to occur as follows:

Month

Sales (in thousands dollars)

Nov 2015 (reference)

$2,266

Dec 2015 (reference)

$2,230

Jan 2016

$2,116

Feb 2016

$2,300

Mar 2016

$2,402

Apr 2016

$2,420

May 2016

$3,390

Jun 2016

$3,909

Jul 2016

$4,164

Aug 2016

$3,933

Sep 2016

$3,163

Oct 2016

$2,912

Nov 2016

$2,886

Dec 2016

$2,424

Month

Sales (in thousands dollars)

Nov 2015 (reference)

$2,266

Dec 2015 (reference)

$2,230

Jan 2016

$2,116

Feb 2016

$2,300

Mar 2016

$2,402

Apr 2016

$2,420

May 2016

$3,390

Jun 2016

$3,909

Jul 2016

$4,164

Aug 2016

$3,933

Sep 2016

$3,163

Oct 2016

$2,912

Nov 2016

$2,886

Dec 2016

$2,424

Jan 2017 (reference)

$2,353

Feb 2017 (reference)

$2,442

Assume all of Fit-and-Forgets sales are on credit, so no cash is received immediately when a sale is made. It is expected that 30 percent of Fit-and-Forgets customers will pay off their accounts in the month of sale, 65 percent will pay off their accounts in the month following the sale, and the remaining 5 percent of the customers will pay off their accounts in the second month following the sale.

Assume that Fit-and-Forgets cost of materials is 20 percent of sales. Fit-and-Forget manufactures fittings expected to be sold in February one month ahead of time, in January. They order all the materials they need for Januarys production schedule one month ahead of time, in December. This schedule repeats for each month of the year. Fit-and-Forget makes all purchases on credit and pays for the material purchased in the following manner: 20 percent is paid in cash in the month of ordering, and the balance of 80 percent is paid in cash during the month following the purchase. That is, 20 percent of Decembers purchase orders are paid for in December, and the balance of 80 percent is paid in January, and so on. Assume Fit-and-Forgets remaining cash outflows are all direct expenses paid for in the month incurred as follows:

Production expenses other than purchases are equal to 14 percent of purchases.

Sales and marketing expenses are 16 percent of sales each month.

General and administrative expenses are $180,000 each month.

Interest expense is expected to be $500,000 for the year. Assume it will be paid all at once in December 2016.

Fit-and-Forgets income tax bill for 2016 is expected to be $1,600,000. The bill will be paid in four equal installments in April, June, September, and December.

Two semiannual dividends of $855,000 each are expected to be declared in 2016. These will be paid in June and December.

Assuming a cash balance of $1,133,000 at the beginning of January, a desired target cash balance of $1,110,000, and short-term loans of $50,000 outstanding at the beginning of the month, calculate total cash inflows, total cash outflows, net cash gain (loss), cash flow summary, and external financing (if any) summary.