accounting
1. Sales in month 1 are $100,000.
2. Sales increase each month by 1.0 percent over the previous month.
3. Gross margin is 45.0 percent.
4. Sales expense is 10.0 percent of sales.
5. General and administrative expense in month 1 is $32,500.
6. General and administrative expenses increase each month by 0.5 percent over the previous month.
7. The income tax rate is 42.0 percent.
8. Days inventory is 90.0.
9. All months have 30 days.
10. No receivables are collected in the month of the sale.
11. Seventy percent of receivables are collected in the month subsequent to the sale.
12. Eighty-five percent of receivables are collected within two months of the sale.
13. Ninety-eight percent of receivables are collected within three months of the sale.
14. Two percent of receivables are never collected.
15. Bad debts are not included in either the sales or general and administrative expense.
16. All payables for inventory are paid in the month subsequent to the purchase
17. Sales and general and administrative expenses are paid in the month in which they are incurred.
18. The debt to equity ratio is to be maintained at a maximum of 2.0.
19. Interest on the long term debt is 5.0 percent annual rate payable in the month it was incurred.
20. All debt is incurred prior to the first sale.
21. Interest expense is not included in either the sales or general and administrative expense.
22. No principal payments will be made on the debt until there is positive cash flow.
23. Income tax estimated payments are made in the fourth, seventh, tenth and the first month of the subsequent year for the previous three months.
24. The owner would prefer to invest the minimum possible and is the only investor.
25. No dividends will be paid until cash flow from operations exceeds $85,000 per month.
What is the minimum she needs to invest so the business does not ever have a negative cash balance. Round all calculations to the nearest dollar. Upload all answers to Canvas.
You can do this problem any way that you want but I thought it might be helpful to tell you how I solved it.
1. Calculated net income for each month. Twenty-four will be plenty.
2. Determined net cash inflows and outflows from operations to see how much was needed each month.
3. Divided the cumulative cash needed between equity and debt based on the debt to equity ratio. (Remember that accounts payable is debt.)
4. Used a “what-if” to determine the amount of debt required so the minimum cash balance was zero.
