RP 6.2

Lulu Lemons Ltd. sells vehicles.The company is planning its cash needs for the month of January, 2021. In the past, Lulu has had to borrow money during the post-Christmas season to offset a significant decline in sales. The following budgeted financial statements have been prepared to assist in preparing a cash flow forecast for January.

		Jan. 31, 2021		Dec. 31, 2020
Assets
Current
Cash		$ 50,000		$ 30,000
Short-term investments				10,000
Accounts receivable		1,160,000		1,300,000
Inventory		450,000		525,000
		1,660,000		1,865,000
PPE, net		1,980,000		2,000,000
		$3,640,000		$3,865,000
Liabilities
Current
Operating loan		$ 280,000		$ 80,000
Accounts payable		220,000		420,000
		500,000		500,000
Non-current borrowings		1,100,000		1,500,000
		1,600,000		2,000,000
Shareholders' Equity
Share capital		1,017,500		920,000
Retained earnings		1,022,500		945,000
		2,040,000		1,865,000
		$3,640,000		$3,865,000

Lulu Lemons Ltd. Budgeted Income Statement For the Month Ended January 31, 2021
Sales				$500,000
Cost of goods sold				350,000
Gross margin				150,000
Other expenses
Commissions		$25,000
Administration		9,600
Depreciation		20,000
Interest		7,900		62,500
Net income				$87,500

Other information:

1. Sales are 100% on credit. Sales are collected in cash over a three-month period: 40% is collected in the following month, 20% in the second month following sale, and 40% in the third month following sale. October 2020 sales totaled $600,000. November sales totaled $600,000 and December sales totaled $700,000.
2. 20% of a month's inventory purchases are paid in cash. 80% is paid the following month. Accounts payable relate solely to inventory purchases.
3. The company maintains its ending inventory levels at 150% of the cost of the merchandise to be sold in the following month. February 2021 sales are budgeted at $400,000. Gross profit is expected to decline from the usual 30% to 25%.
4. Commissions and administration expenses are fixed and paid in cash during the month.
5. No property, plant, or equipment is budgeted to be purchased or sold during the month.
6. The company pays $10,000 cash dividends to shareholders each month.
7. No non-current borrowings will be incurred.
8. No shares will be repurchased.
9. The company can borrow and repay its non-demand operating loan in increments of $10,000 at the end of each month, up to a total loan balance of $500,000. The interest rate on both the operating loan and non-current debt is 1/2% per month. Interest is paid each month on the outstanding balances at the start of the month.
10. The company wants to have a cash balance of $50,000 at the end January.

Required:

1. Prepare a budgeted statement of cash flows for the month ended January 31, 2021. Assume cash and cash equivalents consist of Cash and Short-term Investments. The opening balances of the transaction worksheet are as follows:

ASSETS

=

LIABILITIES

+

S/H EQUITY

Trans.

Cash

+

S/T Invest.

+

Acc. Rec.

+

Invent.

+

PPE

=

Op. Loan

+

Acc. Pay.

+

Non-curr. Borrow.

+

Share Capital

+

Retained Earnings

Desc.

cf.

30,000

10,000

1,300,000

525,000

2,000,000

80,000

420,000

1,500,000

920,000

945,000

12/31/19

Hint:Current and non-current borrowings, and share capital transactions can be deduced from the changes between the opening and ending balances for each account. The SCF can be derived by analyzing the changes in the cash and cash equivalent columns of the worksheet.

Check figures:The needed increase in the operating loan is $200,000.

2. Explain the various sources and amounts of cash flows needed, and comment on the implications.