Problem 2

Bass Blaster Products Ltd. is a retailer that sells sound systems.The company is planning its cash needs for the month of January, 2017.In the past, the company 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 2017 forecasted income statement:

Sales$200,000

Cost of goods sold 150,000

Gross profit 50,000

Variable selling expenses$10,000

Fixed administrative expenses20,000 30,000

Net 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. 10% of credit sales are never collected. November 2016 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, accounts payable 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, 2016 was $90,000. February 2017 sales are budgeted at $150,000. Gross profit percentage is expected to remain unchanged.

f.The company pays $10,000 monthly cash dividends to shareholders.

g.The cash balance at December 31, 2016 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, payable on the first day of the next month. There is no operating loan at December 31, 2016.

Required: Prepare a cash flow forecast for Bass Blaster for the month of January 2017. Include appropriate supporting schedules.