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Sales on account for the first two months of the current yearare budgeted as follows: Jan. $ 560,000 Feb. 957,000 All sales aremade on terms of 2/10, n/30 (2% discount if paid in 10 days, fullamount by 30 days); collections on accounts receivable aretypically made as follows:

Collections within the month ofsale:
Within discountperiod 60 %
After discountperiod 15
Collections withinthe month following sale:
Within discountperiod 15
After discountperiod 7
Returns, allowances,and uncollectibles 3
Total 100 %

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Patrina Schowalter
Patrina SchowalterLv2
28 Sep 2019

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$

Cash Receipts
The sales budget for Perrier Inc. is forecasted as follows:

Month Sales Revenue
May $140,000
June 140,000
July 180,000
August 120,000

To prepare a cash budget, the company must determine thebudgeted cash collections from sales. Historically, the followingtrend has been established regarding cash collection of sales:

60 percent in the month of sale.

20 percent in the month following sale.

15 percent in the second month following sale.

5 percent uncollectible.

The company gives a 1 percent cash discount for payments made bycustomers during the month of sale. The accounts receivable balanceon April 30 is $25,000, of which $6,000 represents uncollectedMarch sales and $19,000 represents uncollected April sales. Preparea schedule of budgeted cash collections from sales for May, June,and July. Include a three-month summary of estimated cashcollections.

Perrier, Inc.
Schedule of Budgeted Cash Collections
Quarterly by Months
May June July Total
Total Cash receipts: $Answer $Answer $Answer $Answer

Case: Chester & Wayne

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.

Questions (use of spreadsheet software isrecommended):

1.Prepare a cash budget for each month of the fourthquarter and for the quarter in total. Prepare supporting schedulesas needed. (Round all budget schedule amounts to the nearestdollar.)

2. You meet with Mr. Chester and Mr. Wayne topresent your findings and happen to bring along your PC with thebudget model software. They are worried about your findings in Part1. They have obviously been arguing over certain assumptions youwere given.

3. Mr. Wayne thinks that the gross margin mayshrink to 27.5 percent because of higher purchase prices. He isconcerned about what impact this will have on borrowings.Comment.

4. Mr. Chester thinks that "stock outs" occur toofrequently and wants to see the impact of increasing inventorylevels to 30 and 40 percent of next quarter's sales on their totalinvestment. Comment on these changes.

5. Mr. Wayne wants to discontinue the cash discount forprompt payment. He thinks that maybe collections of an additional20 percent of sales will be delayed from the month of billing tothe next month. Mr. Chester says "That's ridiculous! We shouldincrease the discount to 3 percent. Twenty percent more would becollected in the current month to get the higher discount." Commenton the cash-flow impacts.

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