4 Profit versus Cashflow Profit = Revenues - ExpensesCashflow = Deposits into and withdrawals from our bank account.
5 Profit versus Cashflow Matching = match revenue & expenses in the same period to determine profit.Timing = Cashflow does not necessarily match the recognition of revenue and expenses.
6 The Cash Management Process Estimate receipts (cash inflows)Plan expenditures (cash outflows)Limit spending to budget (cash control)Compare budgeted to actual cashflows (evaluation)We think it is appropriate to point out to your students that cash management is simply good management and for many organizations the operational management process itself.
7 Cash Management Example EventsPurchase $1,000 of product in September with net 30 creditPay for product from supplier in OctoberGross margin is 50%Pay monthly salaries of $200Product salesSeptOctNovCash250500CreditTotal sales1000
11 Carrie’s Snowblowers (Q4 Income Statement) Fourth Quarter Income Statement, Carrie Company$ 85,689Net income3,3111% per month on ending balanceInterest payable131,000Cash and noncashSG&ALess:220,000Gross margin2,200 units x $100Cost of Sales$440,0002,200 units x $200SalesWill the company have to borrow money even though it is so profitable?
12 Carrie’s Snowblowers (Cash Receipts) 30% of all sales are for cash, 60% of receivables are collected in the month following the sale, 35% are collected two months after the purchase, and the rest become bad debts. There are no accounts receivable outstanding at the beginning of October.You will need to calculate the budgeted cashflows from sales for January, February and March.+35% x (70% x $100,000) = $24,500+ 60% x (70% x $300,000) = $126,000= 30% x $100,000 = $30,000Cash collections for January = $180,500Cash collections for February = ______+ 35% x (70% x $40,000 = $9,800+ 60% x (70% x $100,000) = $42,000= 30% x $300,000 = $90,000Cash collections for December = $141,800+ 35% of two month’s previous credit sales+ 60% of previous month’s credit sales= 30% of the current salesCash collections for the month.Share/Pair Working with your partner, calculate the cashflows received in February from sales in February, December, and October.Cash collections for March = ________
13 Carrie’s Snowblowers (Inventory purchases) - (120% x current month’s sales+ (120% x next month’s sales- 200 units+ 1.2 x 500 units= 200 unitsPurchases for October = 600 unitsPurchases for December = ________Purchases for January = ___________- 600 units+ 1,800 units= 500 unitsPurchases for November = 1,700 units- Beginning Inventory+ Ending inventorySales for the current monthRequired purchases during the current monthShare/Pair Verify the calculation of the December and January purchases.Purchases for February = ___________Purchases for March = ___________
14 Carrie’s Snowblowers (Purchases payments) Cost of goods is $100 per unit. Inventories are bought on credit. 45% paid in the month of purchase and 55% paid in the following month. Accounts payable at the beginning of October were $15K.Purchases = 45% x current month’ purchases + 55% x last month’sCurrent month Last monthFebruary purchases= ____________January purchases+ .55 x 1,700 units x $100= .45 x 300 units x $100December purchases= $107,000+ .55 x 600 units x $100= .45 x 1,700 units x $100November purchases= $109,500+ $15,000 (given)= .45 x 600 units x $100October purchases= $42,000Share/Pair Verify the calculation of the payments for January and February.March purchases= ____________
16 Carrie’s Snowblowers Quiz Name: ___________ First Quarter Income Statement, Carrie CompanyNet income1% per month on end of month loan balanceInterest payableCash and noncashSG&ALess:Gross marginunits x $100Cost of Salesunits x $200SalesAssume interest is paid on the balance at the end of the month. (Example: if month ending loan balance is $8,500 then interest payment that month will be $85.
23 Desired ending inventory FORMULA3 Current month's unit sales FORMULA4 Answer SectionSales BudgetJuneJulyAugustUnitsFORMULA1DollarsFORMULA2Unit Purchases BudgetDesired ending inventoryFORMULA3Current month's unit salesFORMULA4Total units neededFORMULA5Beginning inventoryFORMULA6Purchases (units)FORMULA7Purchases (dollars)FORMULA8$0Cash BudgetCash balance, beginning$8,000Cash receipts:Collections from customers:From April salesFORMULA9From May salesFORMULA10FORMULA11From June salesFORMULA12From July salesFrom August salesTotal cash availableCash disbursements:MerchandiseFORMULA13Variable expensesFORMULA14Fixed expensesFORMULA15Interest paidTotal disbursementsCash balance before financingLess: Desired ending balanceExcess (deficit) of cash over needsFinancingBorrowingRepaymentTotal effects of financingCash balance, ending
26 Resources Hanson Ski Products - Harvard Case Study Case: Teaching notes:Excel for Managerial AccountingGaylord SmithISBN:Management Accounting A Road of DiscoveryJames Mackey & Michael ThomasISBN:Managerial AccountingBill LeeISBN:All curriculum materials except Harvard case studyConsortium Conference web site