The Steatment of Cash Flow Case Medieval Adventure Company Balance Sheet

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Case Study 11-1 Medieval Adventures

Questions

1. Prepare monthly income statements, balance sheets, and cash budgets based on sales increases of 500 units per month and 30-day advanced production for January through September.

See attached income statements, balance sheets and cash budgets.

When will the company need extra funds? How much will be needed? When can a short-term loan to cover the need be repaid?

The company needs extra funds in April to keep from going into a negative bank balance by the end of April. If nothing changes the ending bank balance for April will be -$2500. A short term loan of $2500 will allow the company to continue operating through April. Unfortunately if nothing changes, they will need another short term loan of $25000 to operate through May, $37500 to operate through June, $40000 to operate through July, and $32500 to operate through August. If the business plan is not changed or customers made to pay within the net 30 terms, a short term loan cannot be repaid with the current sales and production schedule.

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?