Howe Ltd. is trying to decide whether it is going to need to take a loan in January to buy a new microcomputer system. The micro- computer will cost $8,800.
The president, Joan Howe, has collected the following information about her operations as at December 31:
1. Balances of selected general ledger accounts:
Cash.....................................$2,500
Accounts payable.......................6,667
2. Sales history and forecast (unit selling price, $10):
October...............................(actual)...........................$45,000
November............................(actual)............................33,000
December............................(actual)............................45,000
January............................(forecast).............................60,000
3. All sales are on credit and are due 30 days after the sale.
4. Cash payments for purchases are as follows: two thirds in the month of purchase; one third in the month after that.
5. Howe Ltd. collects 50% of a month's sales one month after the sale and 45% two months after the sale; 5% are uncollectible.
6. The company purchases inventory as required under terms of 2/10, net 30. It always takes the 2% discount, but records purchases at gross cost. Accounts payable (shown above) relate solely to inventory purchases. Inventory costs $5 per unit, gross.
7. Other expenses, all paid in cash as required, average about 30% of the sales dollar amount. Depreciation is part of these expenses and costs $3,000 per month.
8. Howe Ltd. keeps a minimum cash balance of $4,000.
Instructions
Prepare a cash budget for January, indicating whether Howe Ltd. will need a loan to finance its computer acquisition.