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Chester & Wayne Company: Managerial Accounting

The preparation of a cash budget is quite vital for a business. Irrespective of the size and the nature of the business, it is important for a company to prepare a periodic cash budget because it has a number of benefits. The budget helps an entity to ascertain the amount of cash collected and the payment made during a given period. It also enables a company to determine whether there is adequate cash in the business or there is need to borrow money. The paper seeks to prepare a cash budget for Chester & Wayne Company and the supporting schedules. The company deals with food distribution.

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Discussion of the cash flow statement

The cash budget for the business is presented in the appendix below. From the calculations, the cash collections for the month of October amounted to $761,926. The value rose to $989,455 in the month of November and later dropped to $817,477 in the month of December. The total collection for the quarter amounted to $2,568,858. The total payments also rose from $784,026 in the month of October to $989,455 in November. The value dropped to $817,477 in December. The total payments amounted to $2,590,958. It can be noted the amount of collections and payments were the same in the months of November and December. This can be attributed to the fact that the company had a policy of maintaining the cash balance of $120,000 at the end of every month. Thus, any excess cash is invested in marketable securities. In the case of cash deficit, the company sells the securities. If the amount of cash generated from the sale of securities is not adequate, then the company borrows money. This ensured that there was no cash surplus or deficit in those months. In the month of October, the payments exceeded collections. This created a deficit amounting to $22,100.

Evaluation of assumptions

In the calculations, an assumption was made that the gross profit margin is 30%. A decline in the value of gross profit margin to 27.5% as a result of increase in the purchase price is likely to cause an increase in the total expenses at the end of the month. This causes the cash payments to go up. The amount of borrowing also increases.

An increase in the stock balance aimed at minimizing the occurrence of stock out will create a high balance of ending inventory. In order to achieve a high balance of inventory, the company needs to increase the quantity purchased. This will make the total payment go up, especially in the first month when the policy is implemented. In the subsequent years, there may be no need to increase the quantity purchased. Further, an increase in stock is likely to cause an increase in stock handling and storage costs. This policy may cause an increase in the amount of borrowing (Hansen, Mowen & Guan, 2009).

The proposal of Mr. Wayne to eliminate the 2% cash discount will lower the amount cash collected. The amount collected drops from $2,303,055 to 2,299,725, an equivalent of $3,780. Thus, the proposal by Mr. Wayne results in a decline of the total collection (Collier, 2009). On the other hand, Mr. Chester proposed a discount of 3%, an increase of 1% from the initial value. The amount of cash collected from the credit sales under this proposal is $2,296,905. This value is equivalent to 0.27% from the original value of $2,303,055. Thus, the two proposals will cause in a decline in the amount of cash collected and they will create the need to increase borrowing. Further, the proposal made by Mr. Wayne leads to a higher amount of reduction in cash balance than that of Mr. Chester. In summary, cash budgets assist the management of an organization to analyze how various factors can affect the operation of the business.


Collier, P. (2009). Accounting for managers, USA: John Wiley & Sons Ltd.

Hansen, R., Mowen, M., & Guan, L. (2009). Cost management: accounting & control. USA: South Western Cengage Learning.

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Chester & Wayne

Cash Budget

Cash Budget October November December Total
Cash collection
40% after 2% discount 308,700 324,106 340,334 973,140
25% without discount 196,875 206,700 217,050 620,625
30% next month 225,000 236,250 206,700 667,950
Renting of warehouse 24,000 24,000
Sale of marketable securities 7,351 192,649 200,000
Bank borrowing 29,750 53,393 83,143
Total collection 761,926 989,455 817,477 2,568,858
Less payments
60% of purchases and other 429,871 452,875 470,561 1,353,307
40% of purchases and other 354,155 286,580 301,916 942,651
Equipment 250,000 250,000
Dividend 45,000 45,000
Total payments 784,026 989,455 817,477 2,590,958
Surplus/deficit (Collections – deficit) -22,100 0 0 -22,100
Opening balance 142,100 120,000 120,000 382,100
Closing balance 120,000 120,000 120,000 360,000

Collection schedule

August September October November December January
Sales 750,000 787,500 826,800 868,200 911,600 930,000
Sales that attract discount 300,000 315,000 330,720 347,280 364,640
Discounts 6,000 6,300 6,614 6,946 7,293
Collection less discount 294,000 308,700 324,106 340,334 357,347
Collection without discount 187,500 196,875 206,700 217,050 227,900
Collection 2 months after billing 225,000 236,250 248,040 260,460
Total collections 481,500 730,575 767,056 805,424 845,707

Accounts receivable

Opening balance 1,012,500
August 750,000
September 306,000
October 96,225
November 101,144
December 106,176
January 84,293
Purchases and other expenses
October November December January
Cost of sales 578,760 607,740 638,120 651,000
Add ending inventory 151,935 159,530 162,750
Less beginning inventory -150,388 -151,935 -159,530
Purchases 580,307 615,335 641,340
Selling and administrative expenses 41,340 43,410 45,580
Additional selling 75,000 75,000 75,000
Advertisement 24,804 26,046 27,348
721,451 759,791 789,268

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