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

CHESTER & WAYNE - Master Cash Budget Project

Chester & Wayne is a regional food distribution company. Mr. Chester, CEO, has asked yourassistance in preparing cash-flow information for the last three months of this year. Selectedaccounts from an interim balance sheet dated September 30, have the following balances:Cash $142,100 Accounts payable $354,155Marketable securities 200,000 Other payables 53,200Accounts receivable $1,012,500Inventories 150,388Mr. Wayne, CFO, provides you with the following information based on experience andmanagement 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. Fortypercent of the sales is paid within the discount period in the month following billing. Anadditional 25 percent pays in the same month but does not receive the cash discount. Thirtypercent is collected in the second month after billing; the remainder is uncollectible. Additionalcash of $24,000 is expected in October from renting unused warehouse space.Sixty percent of all purchases, selling and administrative expenses, and advertising expenses ispaid 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 profitaverages 30 percent of sales for the month. Selling and administrative expenses follow theformula 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:The company will acquire equipment costing $250,000 cash in November. Dividends of $45,000will 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 toinvestment in marketable securities. When cash is needed to reach the minimum balance, thecompany policy is to sell marketable securities before borrowing.The company will acquire equipment costing $250,000 cash in November. Dividends of $45,000will 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 toinvestment in marketable securities. When cash is needed to reach the minimum balance, thecompany 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 thenearest dollar.)2. You meet with Mr. Chester and Mr. Wayne to present your findings and happen to bringalong your PC with the budget model software. They are worried about your findings inPart 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 ofhigher purchase prices. He is concerned about what impact this will have onborrowings. Comment.b. Mr. Chester thinks that "stock outs" occur too frequently and wants to see theimpact of increasing inventory levels to 30 and 40 percent of next quarter's saleson their total investment. Comment on these changes.c. Mr. Wayne wants to discontinue the cash discount for prompt payment. He thinksthat maybe collections of an additional 20 percent of sales will be delayed fromthe month of billing to the next month. Mr. Chester says "That's ridiculous! Weshould increase the discount to 3 percent. Twenty percent more would becollected in the current month to get the higher discount." Comment on the cashflowimpacts.