Accounting Assignment

Accounting Assignment

London Lite Packaging

London Lite is a local manufacturing company which packages food products for institutional and commercial customers. They hired you last week to work with the head accountant, Lori Redden.

Peter Hannay is the principle and since he built the company from scratch he focuses on sales and the production aspects of the firm. He has left the administration to others and only reviews his finances periodically since business is booming. He sees the mess in the office area; papers are everywhere, people are scrambling to find things and once in a while customers call to complain their invoices are wrong. Lori, who is the primary finance person working for him, needs some help because clearly she's floundering and he isn't sure what effect this will have on business.

He's not even sure his customers pay on time regularly or what kind of cash he has to work with for major purchases and this is particularly disturbing because Peter also needs to buy some equipment and wants to be certain he has the cash to do so. He certainly isn't getting the full picture from Lori but he has asked others too and has received piecemeal information below.

Late in 2012, either October or November, Peter will need to get a new sealer for his Styrofoam container line. He thinks he can buy it for $279,000 and today he believes he has a bank balance of $135,000. He'd like to pay for it with cash in full to advantage of a discount the supplier is offering. Unfortunately, he would also like to institute a policy in his company of always maintaining a $95,000 cash balance.

Sales are forecast as:

Jan - Mar 2012

$ 895,000

Apr - June 2012

$ 978,000

July - Sept 2012

$1,053,000

Oct - Dec 2012

$1,173,000

Jan - Mar 2013

$ 967,000

His A/R clerk tells him the average collection time on accounts receivable is 55 days and the balance currently outstanding is $534,000. During this discussion, Mr. Hannay has learned that one of his largest customers, Jiffy Parts Ltd. - who owes him 18.5% of the total - has just declared bankruptcy. He's now doubly concerned that he shouldn't expect to see any of that paid and it will make his cash purchase of the sealer difficult or impossible.

Hannay needs to buy in on average 35% of each quarter's sales in supplies during the previous quarter and ordinarily he pays his accounts in 47 days, slightly faster than his customers pay him. Since all his buying and all his sales are on credit, Peter needs to balance this somehow he reckons.

London Lite's other costs for salaries, wages and taxes are about 27% of gross sales and they have a long-term capital equipment loan of $1,791,666 requiring quarterly payments of $86,000 interest on it. When the company needs a temporary operating loan or line of credit, it can get it at 2.75% per quarter and London Lite has a money market account at their bank which pays 2.25% per quarter on short-term ...