Paymore Products places orders for goods equal to 70% of its sales forecast in t

Question

Paymore Products places orders for goods equal to 70% of its sales forecast in the next quarter. The sales forecasts for the next five quarters are as follows:

The firm pays for its goods with a 1-month delay. Therefore, on average, three-fourths of purchases are paid for in the quarter that they are purchased, and one-fourth are paid in the following quarter.

Paymore’s customers pay their bills with a 2-month delay. Therefore, on average, two-fourths of sales are collected in the quarter that they are sold, and two-fourths are collected in the following quarter. Assume that sales in the last quarter of the previous year were $370.

Paymore’s labor and administrative expenses are $80 per quarter and that interest on long-term debt is $60 per quarter.

Suppose that Paymore’s cash balance at the start of the first quarter is $40 and its minimum acceptable cash balance is $70. Work out the short-term financing requirements for the firm in the coming year. The firm pays no dividends. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)

Paymore Products places orders for goods equal to 70% of its sales forecast in the next quarter. The sales forecasts for the next five quarters are as follows:

Explanation / Answer

QTR 1 2 3 4 Sales Forecast 370 450 410 370 450 450 Purchases 287 259 315 315 Cash outflow 215.25 266 301 315 Sales Cash inflow 410 430 390 410 Labor and administrative charges 80 80 80 80 Interest 60 60 60 60 Opening cash balance 40 94.75 118.75 67.75 Closing balance 94.75 118.75 67.75 22.75 Minimum operating cash balance 70 70 70 70 Financing required 0 0 2.25 47.25

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