Please answer question 2, 2.1, 2.2 at bottom.

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 Marketable securities Accounts receivable Inventories

$142,100 Accounts payable $354,155 200,000 Other payables 53,200

$1,012,500 150,388

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:

August September

$750,000 787,500

Budgeted:

October November December January

$826,800 868,200 911,600 930,000

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. 	October	November	December	Total
   Cash Budget
   Cash Collection
   40% after 2% discount	308700	324106	340334	973140
   25% without discount	196875	206700	217050	620625
   30% in next month	225000	236250	206700	667950
   Warehouse rent	24000			24000
   Marketable Securities Sales	7351	192649		200000
   Bank borrowing		29750	53393	83143
   Total Collection	761926	989455	817477	2568858
   Less payments
   60% of purchases and other	429871	452875	470561	1353306
   40% of purchases and other	354155	286580	301916	942652
   Equipment		250000		250000
   Dividends			45000	45000
   Total payments	784026	989455	817477	2590958
   Surplus/Deficits	(22,100)	0	0	(22,100)
   Opening balance	142100	120000	120000	142100
   Closing balance	120000	120000	120000	120000

2. 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.

   1. 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.
   2. 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 cash- flow impacts.