Reference: 07-03
Information on the Actual Sales and Inventory Purchases

question 91

Multiple Choice

Reference: 07-03
Information on the actual sales and inventory purchases of the Law Company for the first quarter follows: $$\begin{array} { | l | l | l | } \hline & \text { Sales } & \begin{array} { l } \text { Inventory } \\\text { Purchases }\end{array} \\\hline \text { January } & \$ 120,000 & \$ 60,000 \\\hline \text { February } & \$ 100,000 & \$ 78,000 \\\hline \text { March } & \$ 130,000 & \$ 90,000 \\\hline\end{array}$$ Collections from Law Company's customers are normally 60% in the month of sale, 30% in the month following sale, and 8% in the second month following sale. The balance is uncollectible. Law Company takes full advantage of the 3% discount allowed on purchases paid for by the end of the following month.
The company expects sales in April of $150,000 and inventory purchases of $100,000. Operating expenses for the month of April are expected to be $38,000, of which $15,000 is salaries and $8,000 is depreciation. The remaining operating expenses are variable with respect to the amount of sales in dollars. Those operating expenses requiring a cash outlay are paid for during the month incurred. Law Company's cash balance on March
1 was $43,000, and on April 1 was $35,000.
-The expected cash balance on April 30 would be:

• A)$62,700.
• B)$28,700.
• C)$19,700.
• D)$54,700.

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Definitions:

Maximum Rate

The highest allowable interest rate or charge on a loan or financial contract as specified by law.

Covenant Not to Compete

A clause in an employment or business agreement that prohibits one party from competing against another for a certain period and in a specific geographic area.

Reasonableness

A standard of fairness, appropriateness, and rationality often used in legal and ethical judgments.

Goodwill

An intangible asset reflecting the value of a company's brand, customer relations, employee morale, and other non-physical assets.