The following table presents Generic Motors Company\'s production budget. GM\'s

Question

The following table presents Generic Motors Company's production budget. GM's inventory policy is to have ending inventory equal to 20% of next month's sales. Required: Fill in the missing numbers in the table above. Why do firms want to hold inventory of finished goods? (an alternative could be to produce exactly the amount they are going to sell, and hold zero inventories) (cash receipts from sales) Budgeted sales revenue for the coming five months is as follows: You estimate that you will collect 40% of sales revenue in the month of sale, 30% in the following month, 25% two months after the sale, and the remaining 5% three months after the sale. Required: Compute budgeted cash inflows for November and December. Is it possible for a firm to run out of cash even though it is profitable? If no, explain why not, if yes, give an example of how that can happen.

Explanation / Answer

b) Firms need to keep inventory due to uncertainties of raw material price also some goods can be a longer time to produce.

2.

a)

Budgeted Cash inflow for November and december is

November $ 140,500 and December $ 130,000 calculated as under:

b)

yes it is possible when the Accounts receivable are there but the collection is not in the current month.

In such cases cash shortage will be there.

Februrary March April Ending Inventory $    1,000.00 $ 4,200.00 $    4,000.00 Beginning Inventory $    1,000.00 $ 4,000.00 $    4,200.00 Budgeted sales $ 14,000.00 $ 5,000.00 $ 21,000.00 Budgeted Production $ 14,000.00 $ 5,200.00 $ 20,800.00 Closing balance should be 20% of next month's sales March Ending Inventory Budgeted sales of April*20% 4200 March ending inventory is April Inventory Sales Add Ending Inventory Less Beginning Inventory is Equal to Production

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