Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 13

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

CASH AND MARKETABLE SECURITIES

MANAGEMENT

I Questions

1 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

2 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

3 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

4 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

5 The average collection period, the ratio of bad debts to credit sales and the aging

of accounts receivable

II Fill in the blanks

1 transactions

2 Precautionary; inflows; outflows

3 speculative

4 Compensating

5 cash budget

6 collection; payment

7 lock-box

8 drafts

9 float

10 concentration

11 depository transfer checks; electronic; wire transfers

13-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

12 returns; costs

13 minimum; average

14 overdraft

15 seasonal; surplus; shortages

16 Default; principal

17 long-term; short-term

III True or False

2 False 6 False 10 True 14 False

3 False 7 False 11 True

IV Practical Problems

PROBLEM 1

1 The firm’s average collection float is:

P50,000 x 5 days = P250,000

2 The firm’s average disbursement float is:

P45,000 x 4 days = P180,000

3 The firm’s average balance at its bank would be:

Cash balance on firm’s books P100,000 Average disbursement float 180,000 Average balance on bank’s books 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 2

1 The expected reduction in cash balances for the year is P120,000

Average daily collections = Annual credit sales365 days

= P14,600,000365 days = P40,000

2 The annual pretax benefit of reducing the collection float is P14,400.

Annual pretax benefit of reducing collection float = (3) (P40,000) (0.12)

= P14,400

3 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 3

1 The funds freed by accelerating collections will be:

P150,000 x 2 days = P300,000

2 The annual savings is:

P300,000 x 0.14 = P42,000

PROBLEM 4

1 Cash conversion cycle = Inventory conversion period + Receivables

conversion period – Payables deferral period

= 60 days + 35 days – 28 days = 67 days

2 Average sales per days = P972,000 / 360 = P2,700

Average investment in receivables = P2,700 (35) = P94,500

PROBLEM 5

Currently, Francisco has 4 (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 8 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.

Reduction in cash balances = Days reduction in float x Average dailycollections

= 3 x P40,000 = P120,000

Annual pretax benefit

of reducing collection

float

Days reduction

in float time Average daily collections

13-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

PROBLEM 6

1 C* = 45,000

2 22,500

3 100

PROBLEM 7

Cash Outflows

Cost of Sales

August (18,240 x 25%) P 4,560.00

September (18,574 x 75%) 13,930.50

Operating Expenses

August (24,480 x 2%) 489.60

September (24,929 x 98%) 24,430.42

October (25,143 x 98%) 24,640.14

PROBLEM 8

Cash Budget December, 2003 Estimated cash receipts

December cash sales (50% x 7,500) P3,750 Collection of receivables

From November sales (50% x 4,000) 2,000 From October sales (50% x 4,200) 2,100

Estimated cash disbursements

December cash purchases (20% x 3,000) 600 Purchases on account

Cash balance, December 31 P4,650

PROBLEM 9

Cash Budget For 2004 Estimated cash receipts

Estimated cash disbursements

Other expenses (excluding depreciation) 51,500

Payment of bank loan (P73,900 – P49,200) 24,700

Excess of receipts over disbursements P 9,800 Cash balance, January 1, 2004 7,100 Cash balance, December 31, 2004 P 16,900

PROBLEM 10

Estimated cash receipts for December

December cash sales (30% x 110,000) P 33,000 Collection of accounts

From December sales (110,000 x 70% x 20%) 15,400 From November sales (120,000 x 70% x 70%) 58,800 From October sales (100,000 x 70% x 10%) 7,000

PROBLEM 11

Cash receipts during May 2003

Cash sales in May (290,000 x 40%) P116,000 Collection of receivables

From May sales (290,000 x 60% x 10%) 17,400 From April sales (300,000 x 60% x 60%) 108,000 From March sales (280,000 x 60% x 20%) 33,600 From February sales (225,000 x 60% x 9%) 12,150

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

Add: Depreciation P50,000

Amortization 10,000 60,000

Working capital from operations 160,000

Less: Increase in accounts receivable 10,000

Decrease in accounts payable 5,000 15,000

Cash flows from financing activities

Payment of mortgage payable (principal) 35,000 *

Payment of dividends 30,000 (65,000)

* Interest expense was already deducted in the income statement.