Reference no: EM131173570
In this case, you have been provided financial information about the company in order to create a cash budget. Management is seeking advice or clarification on three main assumptions the company has been operating. Address Questions 1 and 2 at the end of the case. Based on the case questions, you are required to provide a two to four double-spaced written report providing the necessary advice and explanations to management. The written report should be properly formatted according to APA guidelines and demonstrate research and critical thinking skills. Conclusions and recommendations should be supported by at least 2 scholarly sources from the Ashford Library or other external sources, excluding the textbook.
Address Question 1 by using a spreadsheet to prepare the case budget for the fourth quarter. The cash budget should be included as an appendix to the written report and should be referenced in the written report.
Address Question 2 in a fully developed explanation of two to four double spaced pages to present the findings and explain or validate the assumptions stated in item (a) through (c). In addressing Question 2, be sure to use the cash budget prepared in Question 1 as support for your explanation. The written analysis should be supported by at least two scholarly sources, excluding the textbook.
CASE 6B - CHESTER & WAYNE
Chester & Wayne is a regional food distribution company. Mr. Chester, CEO, has asked your assistance in preparing cash-flow information for the last three months of this year. Selected accounts from an interim balance sheet dated September 30, have the following 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 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, selling 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 goods 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 $750,000 October $826,800 September 787,500 November 868,200
December 911,600
January 930,000
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.
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):
1. 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.)
2. 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.
a. 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. b. 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. c. 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 cashflow impacts.