Chester & Wayne

Chester & Wayne

Student Name
Institution

Chester & Wayne

2
Chester & Wayne

Chester & Wayne is a regional food distribution company. Mr. Chester, CEO, has asked
for my assistance in preparing cash-flow information for the last three months oft his year.
Selected accounts for an interim balance sheet dated September 30, have the following balances:
Cash $142,100

Accounts Payable $354,155 Marketable Securities $200,000

Other Payables 3,200

Accounts Receivable $1,012,500

Inventories $150,388

The following information is provided based on experience and management policy:

Customers paying within 10 days of the billing date may take a 2 percent cash discount

40 percent of the sales is paid within the discount period the month following

25 percent pay in the same month but does not receive cash discount

30 percent collected the 2nd month after billing

Remainder is uncollectable

Additional cash of $240,000 is expected in October from renting warehouse

60 percent of all purchases is paid in month incurred, remainder the following month

Ending inventory is 25 percent of next months budgeted costs

Gross profit averages 30 percent of sales for month

Selling and administrative expenses are 5 percent sales plus $75,000 with $5,000
depreciation

Advertising expenses are 3 %

Actual and budgeted sales information are as follows:

Chester & Wayne

Actual:

Budgeted

August

$750,000.
00

October

$826,800
.00

September

$787,500.
00

November

$868,200
.00

December

$911,600
.00

January

$930,000
.00

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 of $120,000

When cash is needed to reach the minimum the company policy is to sell marketable
securities before borrowing
Cash Budget

Here is the cash budget for each month along with the total for the quarter:
Oct

Nov

Dec

Total

Cash Budget
Cash collection
40% after 2% discount
25% without discount
30% in next month
Renting of warehouse
Sell of Marketable
Securities
Bank Borrowing

$308,700.
00
$196,875.
00
$225,000.
00
$24,000.0
0
$7,351.00

$324,105.
60
$206,700.
00
$236,250.
00
$192,649.
00
$29,750.0

$340,334
.40
$217,050
.00
$206,700
.00

$973,140.0
0
$620,625.0
0
$667,950.0
0

$53,393.

$24,000.00
$200,000.0
0
$83,143.00

Chester & Wayne

Total Collection

$761,926.
00

Less payments
60% of Purchases and
other
40% of Purchases and
other

$429,870.
60
$354,155.
00

Equipment

0
$989,454.
60

00
$817,477
.40

$452,874.
60
$286,580.
40
$250,000.
00

$470,560
.80
$301,916
.40

Dividend

Total payments
Surplus or Deficit
Opening Balance
Closing Balance

$784,025.
60
$22,099.6
0
$142,100.
00
$120,000.
40

$989,455.
00
-$0.40
$120,000.
40
$120,000.
00

$2,568,858
.00

$1,353,306
.00
$942,651.8
0
$250,000.0
0

$45,000.
00

$45,000.00

$817,477
.20

$2,590,957
.80

$0.20
$120,000
.00
$120,000
.20

$22,099.80
$142,100.0
0
$120,000.2
0

The following is the supporting schedule:

Purchases an other
expenses
Cost of good sold
Add ending inventory
Less beginning
inventory
Total Purchases
Selling and admin
Advertising
Total to be paid

$826,800.
00

$868,200.
00

$911,600.
00

$930,000
.00

Oct
$578,760.
00
$151,935.
00
$150,388.
00
$580,307.
00
$111,340.
00
$24,804.0
0
$716,451.
00

NOV
$607,740.
00
$159,530.
00
$151,935.
00
$615,335.
00
$113,410.
00
$26,046.0
0
$754,791.
00

Dec
Jan
$638,120. $651,000
00
.00
$162,750.
00
$159,530.
00
$641,340.
00
$115,580.
00
$27,348.0
0
$784,268.
00

Chester & Wayne

5
Gross Margin

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. Mr. Wayne has
a great concern and based on the budget borrowings will increase as follows:
October $0

November $42,538

December $28,122

Stock Outs
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 quarters sales on their total investment.
The increase in ending inventory requirement will definitely increase the purchases as well as
increase the borrowing, which leads to more funds needed.

Cash Discount
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 believes it is ridiculous and they should increase the discount to 3
percent. Twenty percent more would be collected in the current month to get the higher discount.
I do agree with Mr. Wayne that any delay in the collection will increase the bank load on
borrowing and should not be continued. Offering more of a discount will reduce the borrowing
burden but the company will be liable to early payments which lead to the opportunity of paying
an early payment instead of borrowing. This is something that needs to be determined once the
time comes.
Conclusion

Chester & Wayne

By looking at the cash budget you will be able to determine whether different decisions
can be made based on the future projections. Items such as stock outs and cash discounts are
easily figured out by looking at the budget. The importance of the budget is often overlooked but
can determine many different factors.

References
Managerial accounting: Decision making for the service and manufacturing sectors (2012).
San Diego, CA: Bridgepoint Education