Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 13

CHAPTER 13
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.
2.
3.
4.
5.
6.
7.
8.
9.
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
1.
2.
3.
4.

False
False
False
True

5.
6.
7.
8.

True
False
False
True

9.
10.
11.
12.

True
True
True
True

13. False
14. False

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..........................................................
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 2
1.

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 =
=
2.

Days reduction
in float

x

Average daily
collections

3 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 =
=
3.

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 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 =
=

2.

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 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.

13-4

Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

PROBLEM 6
1.
2.
3.

C* = 45,000
22,500
100

PROBLEM 7
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 8
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 1

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 9

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