Question

Chester & Wayne is a regional food distribution company. Mr.Chester, CEO, has asked your assistance in preparing cash-flowinformation for the last three months of this year. Selectedaccounts from an interim balance sheet dated September 30, have thefollowing balances:

Cash: $142,100

Accounts payable $354,155

Marketable securities: 200,000

Other payables 53,200

Accounts receivable: 1,012,500

Inventories: 150,388

Mr. Wayne, CFO, provides you with the following informationbased on experience and management policy. All sales are creditsales and are billed the last day of the month of sale. Customerspaying within 10 days of the billing date may take a 2 percent cashdiscount. Forty percent of the sales is paid within the discountperiod in the month following billing. An additional 25 percentpays in the same month but does not receive the cash discount.Thirty percent is collected in the second month after billing; theremainder is uncollectible. Additional cash of $24,000 is expectedin October from renting unused warehouse space.

Sixty percent of all purchases, selling and administrativeexpenses, and advertising expenses is paid in the month incurred.The remainder is paid in the following month. Ending inventory isset at 25 percent of the next month's budgeted cost of goods sold.The company's gross profit averages 30 percent of sales for themonth. Selling and administrative expenses follow the formula of 5percent of the current month's sales plus $75,000, which includesdepreciation of $5,000. Advertising expenses are budgeted at 3percent of sales.

Actual and budgeted sales information is as follows:

Actual:

August: $750,000 & September: 787,500

Budgeted: October: $826,800, November: 868,200,December: 911,600, January: 930,000

The company will acquire equipment costing $250,000 cash inNovember. Dividends of $45,000 will be paid in December.

The company would like to maintain a minimum cash balance at theend of each month of $120,000. Any excess amounts go first torepayment of short-term borrowings and then to investment inmarketable securities. When cash is needed to reach the minimumbalance, the company policy is to sell marketable securities beforeborrowing.

1.Preparea cash budget for each month of the fourth quarter and for thequarter in total. Prepare supporting schedules as needed. (Roundall budget scheduleamounts to the nearest dollar.)

2.You meet with Mr. Chester and Mr. Wayne to present your findingsand happen to bring along your PC with the budget model software.They are worried aboutyour findings in Part 1. They have obviously been arguing overcertain assumptions you were given.

3.Mr. Wayne thinks that the gross margin may shrink to 27.5 percentbecause of higher purchase prices. He is concerned about whatimpact this will haveon borrowings. Comment.

4.Mr. Chester thinks that "stock outs" occur too frequently and wantsto see the impact of increasing inventory levels to 30 and 40percent of next quarter'ssales on their total investment. Comment on these changes.

5.Mr. Wayne wants to discontinue the cash discount for promptpayment. He thinks that maybe collections of an additional 20percent of sales will be delayedfrom the month of billing to the next month. Mr. Chester says"That's ridiculous! We should increase the discount to 3 percent.Twenty percent more wouldbe collected in the current month to get the higher discount."Comment on the cash-flow impacts.

*******************************INSTRUCTOR GUIDANCE THAT ISTHROWING ME OFF******************************

I have noticedthat a number of people are getting stuck on the Purchases amountto include in the Accounts Payable/Payments calculation. Here is alittle template to follow for Purchases:

Oct

Nov

Dec

Sales

COGS (70% x Sales)

+ Ending Inventory (25%

of nextmonth's COGS)

EQUALS Total Available

- Beginning Inventory

EQUALS Purchases

Here is a little table thatmight help. I populated October's amounts. Note, the $730,575 isthe amount of collections for Oct that you enter into the templateI provided:

Budgeted collections ofsales:

October

November

December

Cash receipts:

From prior month withdiscount

(98% x 40% xprior month sales) $308,700

From prior month withoutdiscount

(25% x priormonth sales) 196,875

From second prior month

(30% x secondprior month sales) 225,000

Totalcollections $730,575

Discounts given (2% x sales x40%) $6,300

In an effort to help get youstarted with the Week 4 Assignment, I drafted a set of steps foryou to follow.

Let's look at October. Thebeginning balance of cash for October that I provided in the Wordtemplate in the amount of $142,100 is the ending balance of cashfor September. That is your starting point.

First, you take that numberand add cash receipts (receivables collections and rent income) toget the Total Cash Available I gave of $896,675.

Second, you deduct all thevarious disbursements of cash (i.e. outflows) to arrive at theamount of cash before loans and investments that I provided of$837,225.

Finally, you add the cashreceived from any sale of investments and loans taken out, ifnecessary, to arrive at the desired ending cash balance of$120,000.

1)
CASHBUDGET:		October	November	December	4th Q
Beginningbalance		$ 142,100			$ 142,100
Receipts:
	Receivables collection
	Rentincome
	Totalreceipts	$ 754,575	$ 767,056	$ 805,424	$ 2,327,055
Total cashavailable		$ 896,675	$ 887,056	$ 925,424	$ 2,469,155
Disbursements:
	Accountspayable
	Otherpayables
	Equipmentpurchases		$ 250,000
	Dividends			$ 45,000
	Total disbursements	$ 837,225	$ 989,456	$ 817,477	$ 2,644,158
	Balance before loans andinvestments
	Sale (purchase) ofinvestments
	Loans needed(repaid)
	Ending CashBalance	$ 120,000	$ 120,000	$ 120,000	$ 120,000