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Chapter 06: Working Capital and the Financing Decision
6-28
22. Level production and related financing effects (LO3) Esquire Products, Inc., expects the
following monthly sales:
January ............. $24,000 May ............ $4,000 September ......... $25,000
February ........... 15,000 June ............ 2,000 October ............. 30,000
March ............... 8,000 July ............ 18,000 November ......... 38,000
April ................. 10,000 August ........ 22,000 December .......... 20,000
Total sales = $216,000
Cash sales are 40 percent in a given month, with the remainder going into accounts
receivable. All receivables are collected in the month following the sale. Esquire sells all of
its goods for $2 each and produces them for $1 each. Esquire uses level production, and
average monthly production is equal to annual production divided by 12.
a. Generate a monthly production and inventory schedule in units. Beginning inventory in
January is 8,000 units. (Note: To do part a, you should work in terms of units of
production and units of sales.)
b. Determine a cash receipts schedule for January through December. Assume that dollar
sales in the prior December were $20,000. Work part b using dollars.
c. Determine a cash payments schedule for January through December. The production
costs ($1 per unit produced) are paid for in the month in which they occur. Other cash
payments (besides those for production costs) are $7,000 per month.
d. Construct a cash budget for January through December using the cash receipts schedule
from part b and the cash payments schedule from part c. The beginning cash balance is
$3,000, which is also the minimum desired.
e. Determine total current assets for each month. Include cash, accounts receivable, and
inventory. Accounts receivable equal sales minus 40 percent of sales for a given month.
Inventory is equal to ending inventory (part a) times the cost of $1 per unit.
Chapter 06: Working Capital and the Financing Decision
6-29
6-22. Solution:
Esquire Products, Inc.
a. Production and inventory schedule in units
Beginning
Inventory
+
Production1
–
Sales2
=
Ending
Inventory
Jan.
8,000
+
9,000
–
12,000
=
5,000
Feb.
5,000
+
9,000
–
7,500
=
6,500
Mar.
6,500
+
9,000
–
4,000
=
11,500
Apr.
11,500
+
9,000
–
5,000
=
15,500
May
15,500
+
9,000
–
2,000
=
22,500
June
22,500
+
9,000
–
1,000
=
30,500
July
30,500
+
9,000
–
9,000
=
30,500
Aug.
30,500
+
9,000
–
11,000
=
28,500
Sept.
28,500
+
9,000
–
12,500
=
25,000
Oct.
25,000
+
9,000
–
15,000
=
19,000
Nov.
19,000
+
9,000
–
19,000
=
9,000
Dec.
9,000
+
9,000
–
10,000
=
8,000
1 $216,000 sales/$2 price = 108,000 units
108,000 units/12 months = 9,000 units per month
2 Monthly dollar sales/$2 = number of units
Chapter 06: Working Capital and the Financing Decision
6-30
6-22. (Continued)
b.
Esquire Products, Inc.
Cash Receipts Schedule (take dollar values from problem statement)
Jan.
Feb.
Mar.
Apr.
May
June
Sales (in dollars)
$24,000
$15,000
$ 8,000
$10,000
$4,000
$2,000
40% Cash sales
9,600
6,000
3,200
4,000
1,600
800
60% Prior month’s sales
12,000*
14,400
9,000
4,800
6,000
2,400
Total receipts
$21,600
$20,400
$12,200
$ 8,800
$7,600
$3,200
*based on December sales of $20,000
July
Aug.
Sept.
Oct.
Nov.
Dec.
Sales (in dollars)
$18,000
$22,000
$25,000
$30,000
$38,000
$20,000
40% Cash sales
7,200
8,800
10,000
12,000
15,200
8,000
60% Prior month’s sales
1,200
10,800
13,200
15,000
18,000
22,800
Total receipts
$ 8,400
$19,600
$23,200
$27,000
$33,200
$30,800
Chapter 06: Working Capital and the Financing Decision
6-31
6-22. (Continued)
c.
Esquire Products, Inc.
Cash Payments Schedule
Constant production
Jan.
Feb.
Mar.
Apr.
May
June
9,000 units × $1
$ 9,000
$ 9,000
$ 9,000
$ 9,000
$ 9,000
$ 9,000
Other cash payments
7,000
7,000
7,000
7,000
7,000
7,000
Total payments
$16,000
$16,000
$16,000
$16,000
$16,000
$16,000
July
Aug.
Sept.
Oct.
Nov.
Dec.
9,000 units × $1
$ 9,000
$ 9,000
$ 9,000
$ 9,000
$ 9,000
$ 9,000
Other cash payments
7,000
7,000
7,000
7,000
7,000
7,000
Total cash payments
$16,000
$16,000
$16,000
$16,000
$16,000
$16,000
Chapter 06: Working Capital and the Financing Decision
6-32
6-22. (Continued)
d.
Esquire Products, Inc.
Cash Budget
Jan.
Feb.
Mar.
Apr.
May
June
Cash flow
$5,600
$ 4,400
($3,800)
($ 7,200)
($ 8,400)
($12,800)
Beginning cash
3,000
8,600
13,000
9,200
3,000
3,000
Cumulative cash balance
8,600
13,000
9,200
2,000
(5,400)
(9,800)
Monthly loan or (repayment)
-0-
-0-
-0-
1,000
8,400
12,800
Cumulative loan
-0-
-0-
-0-
1,000
9,400
22,200
Ending cash balance
$8,600
$13,000
$9,200
$3,000
$3,000
$ 3,000
July
Aug.
Sept.
Oct.
Nov.
Dec.
Cash flow
($ 7,600)
($3,600)
$ 7,200
$ 11,000
$17,200
$ 14,800
Beginning cash
3,000
3,000
3,000
3,000
3,000
12,200
Cumulative cash balance
(4,600)
6,600
10,200
14,000
20,200
27,000
Monthly loan or (repayment)
7,600
(3,600)
(7,200)
(11,000)
(8,000)
-0-
Cumulative loan
29,800
26,200
19,000
8,000
-0-
-0-
Ending cash balance
$ 3,000
$ 3,000
$ 3,000
$ 3,000
$12,200
$27,000
Chapter 06: Working Capital and the Financing Decision
6-33
6-22. (Continued)
e.
Esquire Products, Inc.
Assets
Cash
Accounts
Receivable
Inventory
Total
Current
Jan.
$ 8,600
$14,400
$5,000
$28,000
Feb.
13,000
9,000
6,500
28,500
Mar.
9,200
4,800
11,500
25,500
Apr.
3,000
6,000
15,500
24,500
May
3,000
2,400
22,500
27,900
June
3,000
1,200
30,500
34,700
July
3,000
10,800
30,500
44,300
Aug.
3,000
13,200
28,500
44,700
Sept.
3,000
15,000
25,000
43,000
Oct.
3,000
18,000
19,000
40,000
Nov.
12,200
22,800
9,000
44,000
Dec.
27,000
12,000
8,000
47,000
The instructor may wish to point out how current assets are at
relatively high levels and illiquid during June through
October. In November and particularly December, the asset
levels remain high, but they become increasingly more liquid
as inventory diminishes relative to cash.
