Case 6B (Chester &Wayne)

Case: Chester
& Wayne

 

Chester & Wayne is

a regional
food
distribution
company

.
Mr.

Chester,
CEO,
has
as
ked
you
r
assistance
in

preparing
cash

-flow
information

for

the

last

three
month

s
of

this
year.
Selected
accounts
from

an
interim
balance

sheet
date
d
September
30
,
have
the follow
ing

balances:

  Cash$142,100Accounts payable$354,155Marketable securities
200,000Other payables53,200Accounts receivable1,012,500  Inventories150,388   

Mr. Wayne,
CFO,
provides
you with
the following information based
on
experience
and

management
policy
.
All
sales

are

credit
sales and are billed
the last day
of the month of sale.
Customers
paying
within

10
days
of the billing
date may
take
a 2 percent

cash discount
. Forty
percent of the sales is paid

within the discount period
in the month following billing.
An
additional
25

percent pays
in the same
month but
does
not
receive
the cash discount.
Thirty
percent is collected
in the second
month after
billing;
the remainder

is uncollectible.
Additional
cash of $24,000
is expected
in October
from renting
unused
warehouse
space.

 

Sixty
percent of all
purchases,
sell
ing
and administrative

expenses

,
and advertising
expenses is paid in the month incurred.
The

remainder is paid in the following month.

Ending
inventory is
set
at

25 percent of the next
month’s

budgeted

cost
of go
ods
sold.
The company’s
gross
profit
averages
30 percent of sales for the month. Selling
and administrative expenses follow the formula
of 5 percent of the current
month’s sales plus
$75,000,
which
includes
depreciation
of $5,000.
Advertising
expenses are budgeted at 3 percent of sales.

 

Actual
and budgeted sales information is as follows:

  Actual: Budgeted: August$750,000October$826,800September787,500November868,200  December911,600  January930,000 

The company will

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

 

The company would
like
to

maintain
a minimum

cash balance at the end
of each
month of $120,000.
Any
excess
amounts
go first
to repayment
of short-term
borrowings
and then
to investment
in marketable

securities.
When
cash is needed
to reach
the minimum balance,
the company policy is to sell marketable securities before
borrowing.

 

Questions (use of spreadsheet software is recommended):

 

Prepare a cash budget for each month of the fourth quarter and for the quarter in total. Prepare supporting schedules as needed. (Round all budget schedule amounts to the nearest dollar.)

 

You meet with Mr. Chester and Mr. Wayne to present your findings and happen to bring along your PC with the budget model software. They are worried about your findings in Part 1. They have obviously been arguing over certain assumptions you were given. Mr. Wayne thinks that the gross margin may shrink to 27.5 percent because of higher purchase prices. He is concerned about what impact this will have on borrowings. Comment.Mr. Chester thinks that “stock outs” occur too frequently and wants to see the impact of increasing inventory levels to 30 and 40 percent of next quarter’s sales on their total investment. Comment on these changes.Mr. Wayne wants to discontinue the cash discount for prompt payment. He thinks that maybe collections of an additional 20 percent of sales will be delayed from 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 would be collected in the current month to get the higher discount.” Comment on the cash-flow impacts.