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.