Campz Company began operations on January 1 of the current year with a $20,000 cash balance. Fifty percent of sales are collected in the month of sale; 50% are collected in the month following sale. Similarly, 25% of purchases are paid in the month of purchase, and 75% are paid in the month following purchase. The following data apply to January and February: $\begin{array} { l r r }
& \text { January } & \text { February } \
\text { Sales } & \$ 50,000 & \$ 50,000 \
\text { Purchases } & 20,000 & 25,000 \
\text { Operating expenses } & 5,000 & 7,000
\end{array}$ If operating expenses are paid in the month incurred and are inclusive of monthly depreciation charges of $2,500, determine the Campz's cash balance at the end of February.

Question

Campz Company began operations on January 1 of the current year with a $20,000 cash balance. Fifty percent of sales are collected in the month of sale; 50% are collected in the month following sale. Similarly, 25% of purchases are paid in the month of purchase, and 75% are paid in the month following purchase. The following data apply to January and February: $\begin{array} { l r r } 
& \text { January } & \text { February } \
\text { Sales } & \$ 50,000 & \$ 50,000 \
\text { Purchases } & 20,000 & 25,000 \
\text { Operating expenses } & 5,000 & 7,000
\end{array}$ If operating expenses are paid in the month incurred and are inclusive of monthly depreciation charges of $2,500, determine the Campz's cash balance at the end of February.

Quizplus · Accepted Answer

To solve the problem, we need to create a schedule that shows the inflows and outflows of cash for Campz for both January and February, and then determine the ending balance for February.

First, let's calculate the cash inflows from sales for January and February:
- January sales: 50% collected in January = $25,000 cash inflow
- February sales: 50% collected in February and 50% collected in March = $25,000 × 0.5 = $12,500 cash inflow in February

Next, let's calculate the cash outflows for purchases for January and February:
- January purchases: 25% paid in January and 75% paid in February = $20,000 × 0.25 = $5,000 cash outflow in January, and $20,000 × 0.75 = $15,000 cash outflow in February
- February purchases: 25% paid in February and 75% paid in March = $25,000 × 0.25 = $6,250 cash outflow in February, and $25,000 × 0.75 = $18,750 cash outflow in March

Now, let's calculate the cash outflows for operating expenses for January and February:
- January operating expenses: $5,000 cash outflow (inclusive of $2,500 depreciation)
- February operating expenses: $7,000 cash outflow (inclusive of $2,500 depreciation)

Putting all of this together into a cash schedule for January and February, we get:

|                | January | February |
|----------------|---------|----------|
| Cash inflows    | $25,000 | $12,500  |
| Cash outflows   | $30,000 | $47,000  |
| Net cash change | -$5,000 | -$34,500 |
| Beginning cash  | $20,000 | $15,000  |
| Ending cash     | $15,000 | $10,500  |

Therefore, the Campz's cash balance at the end of February is $10,500, which corresponds to answer choice (B).

Campz Company Began Operations on January 1 of the Current