Medieval Adventures Company was founded by Aaron Reinholz to produce a game marketed under the name "Castles and Unicorns." Each "Castles and Unicorns" cost the company $35 to produce. In addition to these production costs that varied in direct proportion to volume (so-called variable costs), the company also incurred $10,000 monthly "being in business" costs (so-called fixed costs) irrespective of the month's volume. The company sold its product for $55 each.
As of December 31, Reinholz had been producing "Castles and Unicorns" for three months using rented facilities. The balance sheet on that date was as follows:

Questions
1. Prepare monthly income statements, balance sheets, and cash budgets based on sales increases of 500 units per month and 30-day advance production for January through September. When will the company need extra funds? How much will be needed? When can a short-term loan to cover the need be repaid?
2. How is it possible that a company starts with $250,000 in capital and has profitable sales for a period of six months and still ends up with a zero bank balance? Why did Medieval Adventures need money in April? How could this need have been avoided?
3. From your calculations and financial statements for Question 1, derive cash flow statements for the months of March, May, and July from each month's beginning and ending balance sheets and income statement. Compare these derived cash flow statements with the cash budgets prepared directly in Question 1.

Transcribed Image Text:

MEDIEVAL ADVENTURES COMPANY Balance Sheet As of December 31 Assets Cash Accounts receivable Inventory $146,250 68,750 35,000 $250,000 Equities Common stock Retained earnings $250,000 $250,000