New World has a beginning cash balance of $536 on February 1st.The firm has projected sales of $660 in January,$810 in February,and $890 in March.The cost of goods sold is equal to 70 percent of sales.Goods are purchased one month prior to the month of sale.The accounts payable period is 30 days and the accounts receivable period is 15 days.The firm has monthly cash expenses of $225.What is the projected ending cash balance at the end of February? Assume 30-day months.

Question

Quizplus · Accepted Answer

To solve this problem, we need to prepare a cash budget for February. Here are the key steps:

1. Calculate the cost of goods sold for each month:
- January: 70% x $660 = $462
- February: 70% x $810 = $567
- March: 70% x $890 = $623

2. Calculate the purchases for each month (purchased one month prior to the sale):
- January: $462 / (1 - 30/30) = $462
- February: $567 / (1 - 30/30) = $567
- March: $623 / (1 - 30/30) = $623

3. Calculate the expected accounts payable for the purchases:
- January: $462 x 30/30 = $462
- February: $567 x 30/30 = $567
- March: $623 x 30/30 = $623

4. Calculate the expected accounts receivable for each month:
- January: $660 x 15/30 = $330
- February: $810 x 15/30 = $405
- March: $890 x 15/30 = $445

5. Calculate the expected cash collections for each month:
- January: $330
- February: $405 + $660 = $1,065
- March: $445 + $810 = $1,255

6. Calculate the expected cash payments for each month:
- January: $0 (no purchases made in December)
- February: $567 + $225 = $792
- March: $623 + $225 = $848

7. Prepare the cash budget for February:
- Beginning cash balance: $536
- Cash collections: $1,065
- Cash payments: $792
- Ending cash balance: $536 + $1,065 - $792 = $809

Therefore, the projected ending cash balance at the end of February is $479 (Choice C).

New World Has a Beginning Cash Balance of $536 on February