Question

Freda’s Phones Inc. is a mobile phone retailer. The company is planning its cash needs for the month of January 2023.

The statement of financial position showed the following at December 31, 2022.
Assets
Current
Cash $20,000
Accounts receivable 330,000
Inventory 120,000
470,000
PPE, net 4,000,000
$4,470,000

Liabilities
Current
Operating loan $100,000
Accounts payable 140,000
240,000
Non-current borrowings 3,000,000
3,240,000

Shareholders’ Equity
Common shares 120,000
Retained earnings 1,110,000
1,230,000
$4,470,000

 
Other information:
a. Cash collection
i. November credit sales $0
ii. December credit sales $550,000
iii. % cash sales each month 20%
iv. % credit sales collected in same month 40%
v. % credit sales collect in next month 60%
vi. % credit sales collected in second month 0%
b. January total sales $500,000
c. Inventory information
i. February total sales $450,000
ii. Gross profit ratio January 60%
iii. Gross profit ratio February 60%
iv. % purchases paid in cash same month 20%
v. % inventory on hand needed for next month’s sales 60%
d. Accounts payable at Dec. 31 all relate to inventory purchases and will be paid in full in January

e. Variable expenses as % of total sales, paid each month 30%
f. Fixed expenses
i. Depreciation, including January budgeted PPE purchases $40,000
ii. Other fixed operating expenses, paid each month $30,000
g. Interest rate per month 1%
Interest is paid monthly on opening balances of the operating loan and non-current debt.
h. Corporate income tax rate. 25%
Income taxes are paid at the end of the fiscal year.
i. Monthly cash dividends paid to shareholders $5,000
j. Budgeted PPE purchases for January $15,000
k. January repayments of principal on non-current debt $25,000
l. Desired cash balance at end of January $20,000
m. Maximum operating loan balance at end of January is $200,000
n. Any excess cash will be used to pay down the operating loan.

o.
Any needed cash will be raised by issuing common shares.

 
Required:
1. (19 marks) Using a format like the budget worksheet on the following page, record the above information.
2. (8 marks) Prepare a statement of financial position at January 31, 2023 and budgeted income statement, statement of changes in equity, and statement of cash flows for the month ended January 31, 2023. Show all calculations. For SCF purposes, assume the operating loan is part of cash and cash equivalents.
3. (2 marks) Apprise management of budgeted January operating loan needs.

Answer 1

Management of Freda's Phones Inc. must consider cash collections based on sales and the timing of receivables, alongside disbursements for inventory and expenses, to determine January's operating loan needs within the set limits.

Given the complexities of Freda's Phones Inc.'s budgeting needs for January 2023, it's important to consolidate the provided information strategically to apprise management effectively. The budgeted cash collections, cash disbursements, and operating loan needs are calculated based upon the company's sales projections, cost behaviors, and previously established financial obligations.

To calculate the cash collections, we need to consider the percentage of sales collected from credit sales in the immediate and subsequent months while also factoring in the cash sales instantly generated each month. For disbursements, it's necessary to account for inventory purchases, operating expenditures, and scheduled debt repayments, all of which are dictated by the company's predetermined ratios and budgetary commitments.

Lastly, apprising management of the budgeted operating loan needs involves assessing the net cash differences between the inflows and outflows and determining whether any shortfalls call for the use of an operating loan or if surpluses allow for the loan's repayment, staying within the predetermined loan balance caps.