NARRBEGIN: Silly Sally
Silly Sally,Inc.
Silly Sally,Inc.forecasts the following sales levels: January,$420; February,$435; March,$450; and April,$470.Historically,40% of its sales are for cash.Of the remaining sales,80% are collected in one month,15% are collected in the second month,while the rest remain uncollected.November sales were $380 and December sales were $500.(all values $000)
Purchases are made at 60% of the next month's sales forecast,and are paid for in the month of purchase.Other cash outlays are: rent,$10 monthly; wages and salaries,$50 monthly; a tax payment of $30 in March; an interest payment of $15 in March; and a planned purchase of $20 of new fixed assets in January.
-Suppose Silly Sally,Inc.forecasts an ending cash balance of $20,its minimum desired balance,in January.If February's forecasted cash expenditures are $400,which of the following describes the changes to Silly Sally's cash balance and level of borrowing,if any,related to its minimum cash balance,at the end of February?

Question

Quizplus · Accepted Answer

To determine the net cash flows for February, we need to calculate the cash inflows and outflows for the month.

Cash inflows:
- February cash sales: 40% of $435 = $174 
- February credit sales: 
  -Collected in February: 80% of 60% of $435 = $209 
  -Collected in March: 15% of 60% of $450 = $40.50 
  -Uncollected: 5% of 60% of $450 = $13.50

Total cash inflows: $437

Cash outflows: 
- February purchases: 60% of $450 = $270
- Rent: $10 
- Wages and salaries: $50 
- Interest payment: $15 
- New fixed assets: $20

Total cash outflows: $365

Net cash flows: $437 - $365 = $72

Since Silly Sally, Inc. only needs to maintain a minimum cash balance of $20, the excess $52 can be used to pay down any outstanding borrowing, decreasing their borrowing by $52. Therefore, the correct answer is B.

NARRBEGIN: Silly Sally Silly Sally,Inc