CHESTER & WAYNE - Master Cash Budget ProjectChester & Wayne is a regional food distribution company. Mr. Chester, CEO, has asked yourassistance in preparing cash-flow information for the last three mo

CA S E 6 B C H E S TE R & WAYN E

C he s t er & Wayne i s a reg i ona l food d i s t r i bu ti on co m pany. M r. C he s t er, C EO, ha s a s ked your

a ss i s t ance i n prepar i ng ca s h-f l ow i nfor m a ti on for t he l a s t t hree m on t h s of t h i s year. S e l ec t ed

accoun t s fro m an i n t er i m ba l ance s hee t da t ed S ep t e m ber 30, have t he fo ll ow i ng ba l ance s :

C a s h $142,100 Accoun t s payab l e $354,155

M arke t ab l e s ecur iti e s 200,000 O t her payab l e s 53,200

Accoun t s rece i vab l e $1,012,500

Inven t or i e s 150,388

M r. Wayne, C F O, prov i de s you w it h t he fo ll ow i ng i nfor m a ti on ba s ed on exper i ence and

m anage m en t po li cy. A ll s a l e s are cred it s a l e s and are b ill ed t he l a s t day of t he m on t h of s a l e.

C u s t o m er s pay i ng w it h i n 10 day s of t he b illi ng da t e m ay t ake a 2 percen t ca s h d i s coun t . F or t y

percen t of t he s a l e s i s pa i d w it h i n t he d i s coun t per i od i n t he m on t h fo ll ow i ng b illi ng. An

add iti ona l 25 percen t pay s i n t he s a m e m on t h bu t doe s no t rece i ve t he ca s h d i s coun t . Th i r t y

percen t i s co ll ec t ed i n t he s econd m on t h af t er b illi ng ; t he re m a i nder i s unco ll ec ti b l e. Add iti ona l

ca s h of $24,000 i s expec t ed i n Oc t ober fro m ren ti ng unu s ed warehou s e s pace.

Si x t y percen t of a ll purcha s e s , s e lli ng and ad m i n i s t ra ti ve expen s e s , and adver ti s i ng expen s e s i s

pa i d i n t he m on t h i ncurred. The re m a i nder i s pa i d i n t he fo ll ow i ng m on t h. End i ng i nven t ory i s

s e t a t 25 percen t of t he nex t m on t h' s budge t ed co s t of good s s o l d. The co m pany' s gro ss prof it

average s 30 percen t of s a l e s for t he m on t h. S e lli ng and ad m i n i s t ra ti ve expen s e s fo ll ow t he

for m u l a of 5 percen t of t he curren t m on t h' s s a l e s p l u s $75,000, wh i ch i nc l ude s deprec i a ti on of

$5,000. Adver ti s i ng expen s e s are budge t ed a t 3 percen t of s a l e s .

Ac t ua l and budge t ed s a l e s i nfor m a ti on i s a s fo ll ow s :

The co m pany w ill acqu i re equ i p m en t co s ti ng $250,000 ca s h i n Nove m ber. D i v i dend s of $45,000

w ill be pa i d i n Dece m ber.

The co m pany wou l d li ke t o m a i n t a i n a m i n i m u m ca s h ba l ance a t t he end of each m on t h of

$120,000. Any exce ss a m oun t s go f i r s t t o repay m en t of s hor t - t er m borrow i ng s and t hen t o

i nve s t m en t i n m arke t ab l e s ecur iti e s . When ca s h i s needed t o reach t he m i n i m u m ba l ance, t he

co m pany po li cy i s t o s e ll m arke t ab l e s ecur iti e s before borrow i ng.

The co m pany w ill acqu i re equ i p m en t co s ti ng $250,000 ca s h i n Nove m ber. D i v i dend s of $45,000

w ill be pa i d i n Dece m ber.

The co m pany wou l d li ke t o m a i n t a i n a m i n i m u m ca s h ba l ance a t t he end of each m on t h of

$120,000. Any exce ss a m oun t s go f i r s t t o repay m en t of s hor t - t er m borrow i ng s and t hen t o

i nve s t m en t i n m arke t ab l e s ecur iti e s . When ca s h i s needed t o reach t he m i n i m u m ba l ance, t he

co m pany po li cy i s t o s e ll m arke t ab l e s ecur iti e s before borrow i ng.

Q u e s ti o n s ( u s e of s p r ead s h ee t s of t w a r e i s r eco mm e n ded):

1. P repare a ca s h budge t for each m on t h of t he four t h quar t er and for t he quar t er i n t o t a l .

P repare s uppor ti ng s chedu l e s a s needed. ( R ound a ll budge t s chedu l e a m oun t s t o t he

neare s t do ll ar.)

2. You m ee t w it h M r. C he s t er and M r. Wayne t o pre s en t your f i nd i ng s and happen t o br i ng

a l ong your P C w it h t he budge t m ode l s of t ware. They are worr i ed abou t your f i nd i ng s i n

P ar t 1. They have obv i ou s l y been argu i ng over cer t a i n a ss u m p ti on s you were g i ven.

a. M r. Wayne t h i nk s t ha t t he gro ss m arg i n m ay s hr i nk t o 27.5 percen t becau s e of

h i gher purcha s e pr i ce s . He i s concerned abou t wha t i m pac t t h i s w ill have on

borrow i ng s . C o mm en t .

b. M r. C he s t er t h i nk s t ha t " s t ock ou t s " occur t oo frequen tl y and wan t s t o s ee t he

i m pac t of i ncrea s i ng i nven t ory l eve l s t o 30 and 40 percen t of nex t quar t er' s s a l e s

on t he i r t o t a l i nve s t m en t . C o mm en t on t he s e change s .

c. M r. Wayne wan t s t o d i s con ti nue t he ca s h d i s coun t for pro m p t pay m en t . He t h i nk s

t ha t m aybe co ll ec ti on s of an add iti ona l 20 percen t of s a l e s w ill be de l ayed fro m

t he m on t h of b illi ng t o t he nex t m on t h. M r. C he s t er s ay s "Tha t ' s r i d i cu l ou s ! We

s hou l d i ncrea s e t he d i s coun t t o 3 percen t . Twen t y percen t m ore wou l d be

co ll ec t ed i n t he curren t m on t h t o ge t t he h i gher d i s coun t ." C o mm en t on t he ca s h-

f l ow i m pac t s .