Case Study 11-1 Medieval Adventures

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? How could this need have been avoided?

The company runs out of cash because the aggressive growth schedule cannot be sustained while the customers are allowed to pay invoiced 30 days late. Medieval Adventures needs money in April because the cost to produce the June inventory. Aaron Reinholz stresses the importance of developing good sales channel relationships; therefore he wants prompt deliveries and schedule production 30days before forecasted sales. He needs to hold his customers to this high standard of prompt delivery to stay within the established payment terms of Net 30.