CASE 5-1 You are the Chief Financial Officer (CFO) for Zen Distributors, Inc., a

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CASE 5-1 You are the Chief Financial Officer (CFO) for Zen Distributors, Inc., a media broker that secures shelf space in independent bookstores for small publishing companies. As a member of the company's executive team, you are preparing the operating budget for the fourth quarter of 2015. Your intent is to summarize the budget for team members and provide them with detailed schedules that support your overview Zen's general ledger provides you with current account data on September 30, 2015 (the end of the third quarter) of operations: Accounts (account amounts in thousands of dollars) Debit Credit $8,000 Cash Accounts receivable Inventory Buildings and equipment, net of depreciation Accounts payable Common stock Retained earnings 36,000 S 21,750 150,000 Totals $184,000 $184,000 Jack Closer, Vice President of Sales, estimated that sales should increase slightly from their fourth quarter levels of the previous year. Per your request, he forwarded his monthly fourth quarter sales estimates to you, along with the current month's actual sales and his forecast for January 2016. Sales S 50,000 Month September (actual) October November December January 2016 90,000 48,000 You next met with Mary Balance, Zen's Controller. Ms. Balance informed you that the company prices its products in order to ensure a 25% gross profit margin on sales. Zen has met that margin throughout the first three quarters of 2006, and she was confident that the firm would meet this target margin in the near term. M also told you that, on average, 60% of Zen's customer pay in cash. Those customers receive a one percent discount on the invoice price. The remaining 40% of the customers pay on account Credit sales terms are n/2EOM. This means credit customers must pay the full invoice price by the end of the month following the month in which they purchased merchandise. Mary explained, "Our customers are pretty sophisticated, and they constantly manage their cash flows-just as we do. Consequently, if we make a credit sale in October, they will pay us by the end of November." Mary also stated that Zen typically writes off 1% of credit customer accounts as uncollectible. She added that despite this policy, no writes offs were currently pending as of September 30 and none were expected to originate from third quarter activity. She stated, "In other words, we have a clean slate for the fourth quarter budget. We will collect all of the $20,000 accounts receivable balance at September 30 by the end of October. Therefore, bad debt expense and the allowance for doubtful accounts have zero

Explanation / Answer

Cash Collections Oct Nov Dec Quarter September Credit Sales      20,000.00      20,000.00 October Cash Sales (60% of total Sales less 1% Discount)      35,640.00      35,640.00 October Credit Sales 99% of Total credit Sales( 1% is uncollectible)      23,760.00      23,760.00 November Cash Sales      42,768.00      42,768.00 November Credit Sales 99% of Total credit Sales( 1% is uncollectible)    28,080.00      28,080.00 December Cash Sales ((60% of total Sales less 1% Discount)    53,460.00      53,460.00 Total      55,640.00      66,528.00    81,540.00 2,03,708.00 Inventory Purchases Oct Nov Dec Quarter COGS      45,000.00      54,000.00    67,500.00 Add:Closing Inventory      43,200.00      54,000.00    28,800.00 Goods Available For Sale      88,200.00 1,08,000.00    96,300.00 Less Beginnin Inventory    -36,000.00    -43,200.00 -54,000.00 Purchases      52,200.00      64,800.00    42,300.00 1,59,300.00 Cash Disbursement for Purchases And Operating Expenses Oct Nov Dec Quarter Last Month Inventory Purchases      21,750.00      26,100.00    32,400.00      80,250.00 This Month Inventory Purchases      26,100.00      32,400.00    21,150.00      79,650.00 Administration        2,500.00        2,500.00      2,500.00         7,500.00 General        3,600.00        4,320.00      5,400.00      13,320.00 Commission        7,200.00        8,640.00    10,800.00      26,640.00 Equipment        1,500.00                     -                     -           1,500.00 Total      62,650.00      73,960.00    72,250.00 2,08,860.00 Overall Cash Budget Oct Nov Dec Quarter Beginning Balance 8000        4,990.00      4,558.00 Cash Collections      55,640.00      66,528.00    81,540.00 2,03,708.00 Cash Inflows      63,640.00      71,518.00    86,098.00 2,21,256.00 Cash Payments      62,650.00      73,960.00    72,250.00 2,08,860.00 Net Cash            990.00       -2,442.00    13,848.00 Borrowings 4000 7000 11000 Repayment-Principal 0 0 9000 9000 Repayment-Interest 0 0 130 130 Ending Balance        4,990.00        4,558.00      4,718.00 Pro Forma Income Statement Oct Nov Dec Quarter Revenues 60000 72000 90000 222000 COGS 45000 54000 67500 166500 Gross margin 15000 18000 22500 55500 Ggeneral & Commission (Combined)      10,800.00      12,960.00    16,200.00      39,960.00 Administration        2,500.00        2,500.00      2,500.00         7,500.00 Depreciation 900 900 900 2700 Sales Discounts 360 432 540 1332 Bad Debt Expenses 240 288 360 888 Interest Expenses 40 110 20 170 Net Income            160.00            810.00      1,980.00         2,950.00

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