Medieval Adventures Company Questions: 1. ) Prepare monthly income statements, balance sheets, and cash budgets based on sales increases of 500 units per month and a 30-day advance production for January through September. When will the company need extra funds? How much will be needed? When can a short-term loan to cover the need be repaid? Please see the attached financial statements that follow. A projected analysis of the Cash Budget for Medieval Adventures yields a negative cash balance by April month-end.
Assuming the company’s costs (expenses) are paid within the month incurred, additional funds are required within the month of April. Medieval projects a positive cash balance of $30,000 at March month-end. In April, the company Medieval Adventures – April Analysis: 571 Units Cash Balance, April 1, 20xx: $30,000 will incur a fixed “being in business” expense of Expenses: $10,000 and a variable cost of $35 per unit Being in Business Cost: (10,000) purchased. Therefore, additional funding would Cost of Producing 571 units: (19,985) need to be in place prior to the production of the 572 Balance: unit.
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Further analysis of the Cash Budget indicates a continued cash balance decline to a maximum value of $40,000 at July month-end before trending upward. Not inclusive of taxes or incurred monthly finance charges, a short-term loan of $40,000 could be either be paid lump-sum at the end of October, or via three payments of $7,500, $17,500, and $15,000 in the months of August, September, and October respectively. See the example amended Cash Budgets below. Note: these amended budgets include assumed continued sales increases of 500 units for the months of October and November. per month in preparation for the upcoming month’s sales, he is producing units in excess of those being sold in the current month.
Therefore there is a monthly increase in inventory non-cash item of $17,500 (500 units x $35) reducing his net cash flow. Additionally, Reinholz is incurring an increase in accounts receivable through delayed collection practices. This non-cash item stabilizes at $55,000 monthly beginning in March. Therefore, while profitable, Medieval Adventures cash flow from operating activities is negative each month through August resulting in a sub-zero bank balance in April; it is not until a net income in excess of $72,500 ($17,500 + $55,000) is achieved that the trend is reversed.
This scenario could be avoided (or minimalized) through one of two measures. First, Reinholz could delay production, thereby deferring costs closer towards revenue receipt of the unit produced. Secondly, more aggressive collection efforts or buyer incentives such various sales/cash discounts could be used to lessen the affect of monthly increases in accounts receivable. 3. ) From your calculations and financial statements for Question 1, derive cash flow statements for the moths of March, May, and July from each month’s beginning and ending balance sheets and income statement.
Compare these derived cash flow statements with the cash budgets prepared directly in Question 1. Please see the accompanying financial statements and Cash Flow Statement for the Months of March, May and July that follow. In comparison, the cash flow statements for each of the months in question indicate Cash at End of Month identical to the projection of the prepared budget.