Chester & Wayne is a regional food distribution company. Mr. Chester, CEO, has asked for assistance with preparing cash-flow information for the last three months of this year. The 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, provided 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. …show more content…
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. After review of the findings above, although borrowing will not change in October, it will increase by $42,538 in November and $28,122 in December.
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. Increasing inventory levels will increase sales, however, will also increase borrowing as additional funds will be needed.
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