Pluto has a beginning cash balance of £430 on February 1^st.The firm has projected sales of £600 in January,£800 in February and £900 in March.The cost of goods sold is equal to 70% of sales.Goods are purchased one month prior to the month of sale.The trade payables period is 30 days and the trade receivables period is 15 days.The firm has monthly cash expenses of £180.What is the projected ending cash balance at the end of February? Assume that every month has 30 days.

Question

Quizplus · Accepted Answer

To calculate the projected ending cash balance at the end of February, we need to first calculate the cash collections, cash disbursements, and cost of goods sold for February:

Cash collections:
- January sales: £600 x (15/30) days = £300
- February sales: £800 x (15/30) days = £400
Total cash collections = £700

Cost of goods sold:
- February sales: £800 x 70% = £560
Goods purchased in January need to be paid in February, so this adds to the cash disbursements for February.

Cash disbursements:
- Cost of goods sold (see above): £560
- Monthly cash expenses: £180
- Trade payables from January purchases: £560 x (30/30) days = £560
Total cash disbursements = £1,300

Net cash flow for February = cash collections - cash disbursements = £700 - £1,300 = -£600

This means the projected ending cash balance at the end of February is the beginning cash balance plus the net cash flow:
£430 + (-£600) = £-170

However, we need to adjust for the fact that the trade receivables period is only 15 days, meaning that only a portion of the February sales will be collected in March. Let's assume that 50% of the February sales will be collected in March, while the other 50% was collected in February. This means we can add back £400 (50% of February sales) to the net cash flow:

Net cash flow for February = cash collections - cash disbursements + (50% of February sales) = £700 - £1,300 + £400 = -£200

Projected ending cash balance at the end of February = beginning cash balance + net cash flow = £430 + (-£200) = £230

Therefore, the correct answer is C) £390, which is the only choice that is greater than the beginning cash balance of £430.

Pluto Has a Beginning Cash Balance of £430 on February