The following planning assumptions should be used in your OFFER DISCOUNTS SCENARIO.

Scenario Background:

HB wants to improve its cash flow, and wants to understand the impact of more favorable credit terms with customers.

The company has decided to offer 5% sales discounts to all cash customers and 2% sales discounts to credit customers who pay in the same quarter as purchase. The company believes the incentives will shift the mix of cash/credit purchases. These changes would be effective Jan 1, Year 2. The company wants to understand the impact of this proposal.

Using the spreadsheet you have developed in Scenario #1 and the new information below, show the impact on the schedules and pro forma statements. Then, state definitively your recommendation as it relates to this new scenario.

Should the company offer sales discounts?

Revised Assumptions for Cash Collections from Customers

• Customers pay 70% in cash, 30% credit
• 50% of credit sales will be collected in the current quarter; the remaining will be collected in the following quarter; only assume credit customers paying in the same quarter as purchase take the 2% discount
• All Cash customers receive a 5% discount
• Uncollectible accounts are negligible and thus ignored

Additional Operating Budget (through EBIT) Assumptions

• Note, all forecasted sales discounts should be subtracted from Gross Revenue on the operating budget to arrive at Net Revenue

  Each budget scenario should contain the following schedules:

• Sales budget
• Schedule of expected cash collections for sales
• Merchandise Purchases budget (Using COGS as a proxy for Sales) ($)
• Schedule of expected cash disbursements for merchandise purchases
• Operating budget through Operating Income (EBIT)
• Cash budget (by quarter)
• Pro Forma Income Statement (by quarter and for the year)
• Pro Forma Balance Sheet (as of 12/31)
• Pro Forma Statement of Cash Flows (indirect method; for the year)