CHAPTER 13 CASH AND MARKETABLE SECURITIES MANAGEMENT I Questions Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes Because the funds must be available when needed, the primary concern should be with safety and liquidity rather than the maximum profits Float exists because of the delay time in check processing Electronic funds transfer, or the electronic movement of funds between the computer terminals, would eliminate the need for checks and thus eliminate float A firm could operate with a negative balance on the corporate books knowing float will carry them through at the bank Checks written on the corporate books may not clear until many days later at the bank For this reason, a negative account balance on the corporate books of P100,000 may still represent a positive balance at the bank By slowing down disbursements or the processing of checks against the corporate account, the firm is able to increase float and also to provide a source of short-term financing The average collection period, the ratio of bad debts to credit sales and the aging of accounts receivable II Fill in the blanks 10 11 transactions Precautionary; inflows; outflows speculative Compensating cash budget collection; payment lock-box drafts float concentration depository transfer checks; electronic; wire transfers 13-2 12 13 14 15 16 17 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations returns; costs minimum; average overdraft seasonal; surplus; shortages Default; principal long-term; short-term III True or False False False False True True False False True 10 11 12 True True True True 13 False 14 False IV Practical Problems PROBLEM 1 The firm’s average collection float is: P50,000 x days = P250,000 The firm’s average disbursement float is: P45,000 x days = P180,000 The firm’s average balance at its bank would be: Cash balance on firm’s books Average disbursement float Average balance on bank’s books P100,000 180,000 P280,000 Thus, B & B Inn has an excess of P180,000 of bank net collected balances over the balances shown on its own books PROBLEM The expected reduction in cash balances for the year is P120,000 Average daily collections = = Annual credit sales 365 days P14,600,000 365 days = P40,000 Cash and Marketable Securities Management Reduction in cash balances = = Days reduction in float x Average daily collections x P40,000 = P120,000 The annual pretax benefit of reducing the collection float is P14,400 Annual pretax benefit of reducing collection = Days reduction in float time float x Average daily collections Annual pretax benefit of reducing collection float = = 13-3 x Expected return (3) (P40,000) (0.12) P14,400 Yes, Executive Hotel should adopt the lockbox system because the annual pretax benefit of P14,400 exceeds the P10,000 cost charged by the bank PROBLEM The funds freed by accelerating collections will be: P150,000 x days = P300,000 The annual savings is: P300,000 x 0.14 = P42,000 PROBLEM Cash conversion cycle = = Average sales per days = Inventory conversion period + Receivables conversion period – Payables deferral period 60 days + 35 days – 28 days = 67 days P972,000 / 360 = P2,700 Average investment in receivables = P2,700 (35) = P94,500 PROBLEM Currently, Francisco has (P250,000) = P1,000,000 in unavailable collections If lockboxes were used, this could be reduced to P750,000 Thus, P250,000 would be available to invest at percent, resulting in an annual return of 0.08 (P250,000) = P20,000 If the system costs P25,000, Francisco would lose P5,000 per year by adopting the system 13-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM C* = 45,000 22,500 100 PROBLEM Cash Outflows September October Cost of Sales August September October (18,240 (18,574 (18,574 (18,734 Operating Expenses August (24,480 September (24,929 (24,929 October (25,143 x x x x 25%) 75%) 25%) 75%) P 4,560.00 13,930.50 x 2%) x 98%) x 2%) x 98%) 489.60 24,430.42 Total P 4,643.50 14,050.50 498.58 24,640.14 P43,410.52 P43,832.72 PROBLEM Cash Budget December, 2003 Estimated cash receipts December cash sales (50% x 7,500) Collection of receivables From November sales (50% x 4,000) From October sales (50% x 4,200) Total Estimated cash disbursements December cash purchases (20% x 3,000) Purchases on account November (80% x 3,000) Total Wages Operating expenses Total Surplus Cash balance, December P3,750 2,000 2,100 P7,850 600 2,400 P3,000 2,100 1,400 P6,500 P1,350 3,300 Cash and Marketable Securities Management Cash balance, December 31 PROBLEM 13-5 P4,650 Cash Budget For 2004 Estimated cash receipts Sales P403,900 Estimated cash disbursements Operating costs Other expenses (excluding depreciation) Purchases of new furniture Payment of bank loan (P73,900 – P49,200) Total disbursement P302,300 51,500 15,600 24,700 P394,100 Excess of receipts over disbursements P 9,800 Cash balance, January 1, 2004 Cash balance, December 31, 2004 7,100 P 16,900 PROBLEM 10 Estimated cash receipts for December December cash sales (30% x 110,000) Collection of accounts From December sales (110,000 x 70% x 20%) From November sales (120,000 x 70% x 70%) From October sales (100,000 x 70% x 10%) Total cash receipts P 33,000 15,400 58,800 7,000 P114,200 PROBLEM 11 Cash receipts during May 2003 Cash sales in May (290,000 x 40%) Collection of receivables From May sales (290,000 x 60% x 10%) From April sales (300,000 x 60% x 60%) From March sales (280,000 x 60% x 20%) From February sales (225,000 x 60% x 9%) Total cash receipts P116,000 17,400 108,000 33,600 12,150 P287,150 13-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM 12 Sampaguita Corporation Statement of Cash Flows For year 2003 Cash flows from operations Net income Add: Depreciation Amortization Working capital from operations Less: Increase in accounts receivable Decrease in accounts payable Cash flow from operations P100,000 P50,000 10,000 10,000 5,000 60,000 160,000 15,000 P145,000 Cash flows from financing activities Payment of mortgage payable (principal) Payment of dividends 35,000 * 30,000 Net cash flows * Interest expense was already deducted in the income statement (65,000) P 85,000 .. .13- 2 12 13 14 15 16 17 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations returns; costs minimum; average overdraft... 108,000 33,600 12,150 P287,150 13- 6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM 12 Sampaguita Corporation Statement of Cash Flows For year 2003 Cash flows... P25,000, Francisco would lose P5,000 per year by adopting the system 13- 4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM C* = 45,000 22,500 100 PROBLEM Cash