Lewis collects 20 percent of its sales in the month of the sale, 50 percent in the month following the sale, and the remaining 30 percent 2 months following the sale. During November and December of 2013, Lewiss sales were $220,000 and $175,000, respectively. Lewis purchases raw materials 2 months in advance of its sales. These purchases are equal to 65 percent of its final sales. The supplier is paid 1 month after delivery. Thus, purchases for April sales are made in February and payment is made in March. In addition, Lewis pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter beginning in March. The companys cash balance as of December 31, 2013, was $28,000; a minimum balance of $25,000 must always be maintained to satisfy the firms bank line of credit agreement. Lewis has arranged with its bank for short-term credit at an interest rate of 12 percent per annum (1 percent per month) to be paid monthly. Borrowing to meet estimated monthly cash needs takes place at the end of the month, and interest is not paid until the end of the following month. Consequently, if the firm needed to borrow $50,000 during April, then it would pay $500 (=0.01*$50,000) in interest during May. Finally, Lewis follows a policy of repaying its outstanding short- term debt in any month in which its cash balance exceeds the minimum desired balance of $25,000.

a) Lewis needs to know what its cash requirements will be for the next 6 months so that it can renegotiate the terms of its short-term credit agreement with its bank, if necessary. To evaluate this problem, the firm plans to evaluate the impact of a 20 percent variation in its monthly sales efforts. Prepare a 6-month cash budget for Lewis and use it to evaluate the firms cash needs.

b) Lewis has a $20,000 note due in June. Will the firm have enough cash to repay the loan?

2) Extract Gross Margin and Cost of Goods Sold from part 1. Assume that their relationship to sales doesnt change over the contemplated period.

a) Determine Inventory turnover and AR turnover

b) How long is the operating cycle?

c) Assume the operating cycle increases by 20% (x1,2) due to unforeseen reason, how will that impact the cash budget?

d) What would be the probable effect on a firms cash position of the following events?

1) Rapidly rising sales

2) A delay in the payment of payables

3) A more liberal credit policy on sales (to the firms customers)

4) Holding larger inventories

What conclusions can you draw from this exercise?

Hints:

Problem 1 : When you calculate the impact of +- 20%, rent, other expenditures and taxes remain stable, those are not affected by the +- 20%.

Problem 2: In order to calculate Income statement: Sales = (Sales November + Sales December) X 6

COGS = 65% of Sales

Other expenses = 30000 x 12

Taxes = 90000

Problem 2c: You could also answer this question without calculations.

1) Lewis Printing has projected its sales for the first 8 months of 2014 as follows: January February March $100,000 120,000 150,000 April May June $300,000 275,000 200,000 July August $200,000 180,000