91Ó°ÊÓ

Retail outlets purchase snowboards from Slopes, Inc., throughout the year. However, in anticipation of late summer and early fall purchases, outlets ramp up inventories from May through August. Outlets are billed when boards are ordered. Invoices are payable within 60 days. From past experience, Slopes' accountant projects \(20 \%\) of invoices will be paid in the month invoiced, \(50 \%\) will be paid in the following month, and \(30 \%\) of invoices will be paid two months after the month of invoice. The average selling price per snowboard is \(\$ 450\). To meet demand, Slopes increases production from April through July, because the snowboards are produced a month prior to their projected sale. Direct materials are purchased in the month of production and are paid for during the following month (terms are payment in full within 30 days of the invoice date). During this period there is no production for inventory, and no materials are purchased for inventory. Direct manufacturing labor and manufacturing overhead are paid monthly. Variable manufacturing overhead is incurred at the rate of \(\$ 7\) per direct manufacturing labor-hour. Variable marketing costs are driven by the number of sales visits. However, there are no sales visits during the months studied. Slopes, Inc., also incurs fixed manufacturing overhead costs of \(\$ 5,500\) per month and fixed nonmanufacturing overhead costs of \(\$ 2,500\) per month. The beginning cash balance for July \(1,2012,\) is \(\$ 10,000.0 n\) 0ctober \(1,2011,\) Slopes had a cash crunch and borrowed \(\$ 30,000\) on a \(6 \%\) one- year note with interest payable monthly. The note is due October 1,2012 Using the information provided, you will need to determine whether Slopes will be in a position to pay off this short-term debt on 0 ctober 1,2012. 1\. Prepare a cash budget for the months of July through September 2012. Show supporting schedules for the calculation of receivables and payables. 2\. Will Slopes be in a position to pay off the \(\$ 30,000\) one-year note that is due on 0 ctober \(1,2012 ?\) If not what actions would you recommend to Slopes' management? 3\. Suppose Slopes is interested in maintaining a minimum cash balance of \(\$ 10,000\). Will the company be able to maintain such a balance during all three months analyzed? If not, suggest a suitable cash management strategy.

Step by step solution

01

Determine Cash Inflows from Receivables

The invoices are projected to be paid as 20% in the invoiced month, 50% the following month, and 30% two months later. Calculate the cash collections for July, August, and September based on past sales invoices.

02

Calculate Monthly Cash Inflows from Sales

Determine the total cash inflows for each month by adding the cash collections calculated in step 1. Assume past sales data to predict collections for the months of July, August, and September.

03

Determine Cash Outflows from Expenses and Interest

Identify all cash outflows for July, August, and September, including payments for direct materials, direct labor, overhead costs, and interest on the loan. Use the provided interest rate (6%) for loan payment calculations.

04

Compile Cash Budget

Combine the cash inflows and outflows into a monthly cash budget for July, August, and September. Deduct cash outflows from inflows to determine the ending cash balance for each month.

05

Evaluate Ability to Pay Note

Using the compiled cash budget, assess if the ending cash balance on September 30, 2012, is sufficient to pay the $30,000 note due on October 1, 2012.

06

Analyze Cash Balance Maintenance

Ensure the company can maintain the $10,000 minimum cash balance throughout the three-month period based on the cash budget.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91Ó°ÊÓ!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Receivables and Payables Management

Managing receivables and payables is integral to maintaining healthy cash flow. Receivables are amounts owed to a company by customers. In the case of Slopes, Inc., retail outlets purchase snowboards with payments structured over a period of 60 days. Slopes tracks when these payments are expected: 20% within the month, 50% next month, and 30% in two months. Frequent monitoring helps predict cash inflows accurately, ensuring the company has enough funds for upcoming expenses.

On the other side, payables are what the company owes to suppliers or creditors. For Slopes, these include costs like direct materials and labor, due within 30 days. Properly managing these timelines means Slopes can avoid penalties and maintain better supplier relationships. The synchronization between cash inflows from receivables and cash outflows for payables helps avoid a cash crunch.

By aligning receivables and payables management, Slopes can forecast potential shortfalls or surpluses, ensuring timely payments and effective financial planning. Understanding this concept provides businesses with the tools to optimize their cash positions and ensure stable operations year-round.

Cash Flow Analysis

Cash flow analysis is crucial for understanding the movement of cash into and out of a business. For Slopes, Inc., analyzing cash flow involves closely examining cash inflows from snowboard sales and cash outflows related to production and overhead expenses. This process helps Slopes track the timing and amounts of cash they expect to receive and pay out each month.

A comprehensive cash flow analysis starts with identifying all sources of cash inflow, such as receivables, and calculating expected collections for each month. Slopes uses past experience and payment patterns from customers to estimate these amounts. Next, it involves listing all forms of cash outflows, including payments for manufacturing costs, fixed overheads, and other recurring expenses.

• The cash budget integrates this data, producing a forecast of ending cash balances on a monthly basis.
• This allows Slopes to understand how current financial decisions will impact future cash availability.

Effective cash flow analysis enables Slopes to anticipate periods of cash surplus or deficit and to develop strategies to manage them. This may mean adjusting credit terms with suppliers or renegotiating payment schedules with customers. By consistently analyzing cash flow, businesses can ensure they meet their financial obligations and avoid liquidity issues.

Short-term Debt Management

Short-term debt management involves strategies to handle obligations that must be paid within a year. For Slopes, Inc., the challenge is the $30,000 note due on October 1, 2012. Effective management ensures that there is enough cash to meet these obligations without disturbing operational needs.

The first step is ensuring regular tracking and planning through the cash budget. With accurate cash inflow and outflow forecasts, Slopes can identify times when cash reserves may dip below required levels, prompting the need for immediate action.

• One approach might be slowing down non-urgent expenses during low cash periods.
• Another option could include negotiating extended payment terms with suppliers.

It's crucial for Slopes to maintain their minimum cash balance goal. At the same time, an understanding of their cash position relative to short-term debt obligations allows them to plan for adjustments or refinancing options if needed.

Short-term debt management requires a precise balancing act. The objective is to honor debt commitments without compromising everyday business operations. It promotes financial discipline and enhances long-term stability, ensuring businesses like Slopes can thrive without fiscal interruptions.