Answered: Chai is required to maintain a minimum…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Chai Me, Inc., a merchandiser of herbal tea products, began operations on January 1. The company expects sales in its first month of operations to total $18,000. 80% of the sales are expected to be cash sales. The remaining sales are expected to be on account and will carry payment terms of net 30. The company estimates that 99% of its sales on account will be collected in the month following the month of sale. The remaining 1% is deemed uncollectible. The company will recognize bad debt expense under the allowance method of accounting for bad debts in the month in which the credit sales occur.

Inventory purchases during January are expected to equal $4,000. Purchases are paid for in the month of purchase. No purchase discounts are available.

Chai pays its sales staff a 10% commission on all sales made. The commission expense is recognized in the month of sale and is paid on the 10th of the following month. Chai’s expected fixed monthly operating expenses are $4,570. Included in this amount is $500 of depreciation expense. All cash operating expenses are paid in the month incurred.

Chai plans to take out a business loan with a local bank at the beginning of January. The entire amount borrowed will be immediately reinvested in the business to purchase assets and inventory. Interest will not begin to accrue until February; however, Chai is required to make a principal payment of $2,000 at the end of January.

Chai is required to maintain a minimum cash balance of $5,000 at the end of each month by the bank. Which of the following statements is correct?

Chai should anticipate having to pull $670 from an established line of credit if it makes no changes to the above plan.

Chai expects to collect $3,564 from January sales on account in February.

Chai's budgeted operating expenses for January are $6,406.

Chai will pay for 100% of January inventory purchases in January.

All of the above statements are correct.

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