A manufacturing firm has a 90 day collection period. The firm produces seasonal merchandise and thus has the least sales during the first quarter of a year and the highest level of sales during the third quarter of a year. The firm maintains a relatively steady level of production which means that its cash disbursements are fairly equal in all quarters. The firm is most apt to face a cash-out situation in:

Question

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The firm is most likely to face a cash-out situation in the second quarter because it has the least sales in the first quarter, and with a 90-day collection period, the cash from these sales will be collected in the second quarter. Since production costs are steady, the firm may not have enough cash inflow to cover its expenses in the second quarter.

A Manufacturing Firm Has a 90 Day Collection Period