Cost of goods sold is 60% of sales.Purchases are made and paid for two months prior to the sale.40% of sales are collected in the month of the sale,40% are collected in the month following the sale,and the remaining 20% in the second month following the sale.Total other cash expenses are $40,000/month.The company's cash balance as of March 1,2004 is projected to be $40,000,and the company wants to maintain a minimum cash balance of $15,000.Excess cash will be used to retire short-term borrowing (if any exists).Fielding has no short-term borrowing as of March 1,2004.Assume that the interest rate on short-term borrowing is 1% per month.
-Based on the information in Table 2,how much short-term financing is needed by March 30,2004?

Question

Quizplus · Accepted Answer

To find out how much short-term financing is needed by March 30, we need to calculate the total cash outflow for the month of March.

Total cash inflow in March: 
40% of February sales (40% of $1,050,000) = $420,000 
20% of January sales (20% of $900,000) = $180,000 
Total cash inflow = $600,000

Total cash outflow in March: 
Cost of goods sold (60% of March sales) = 60% of $1,200,000 = $720,000 
Total other cash expenses = $40,000

Total cash outflow = $760,000

Therefore, the cash shortfall for March is $160,000 ($760,000 - $600,000).

Since the company wants to maintain a minimum cash balance of $15,000 and the projected cash balance as of March 1 is $40,000, we can subtract $55,000 ($40,000 - $15,000) from the cash shortfall to get the amount of short-term financing needed:

Short-term financing needed = $160,000 - $55,000 = $105,000

However, we also need to consider the interest on short-term borrowing. Assuming an interest rate of 1% per month, the interest on borrowing $105,000 for one month would be $1,050.

Therefore, the total short-term financing needed is $105,000 + $1,050 = $106,050, which is closest to option D ($85,000).

Cost of Goods Sold Is 60% of Sales