CHAPTER 18
PIEPKORN MANUFACTURING
WORKING CAPITAL MANAGEMENT
1. The cash flow each quarter will consist of the sales collection, minus the suppliers paid, expenses,
For the 1st quarter, this is simply 80 percent of the beginning A/R balance. For the remaining
Accounts receivable from current quarter sales:
Purchases last quarter paid this quarter:
The company purchases one-half of next quarter sales in the current quarter and takes 42 days to pay
Purchases for next quarter paid this quarter:
Using the same payables period, the company will pay part of the current quarter orders. The current
Expenses are simply 30 percent of gross sales, while interest is constant. The cash flows for each
quarter will be:
CHAPTER 18 C-2
Net Cash Inflow
Q1 Q2 Q3 Q4
A/R at beginning of Q collected $504,000.00 $730,222.22 $771,444.44 $806,777.78
Sales collection in current Q 509,777.78 538,555.56 563,222.22 596,111.11
So, the cash balance each quarter is:
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $240,000.00 $113,111.11 $187,888.89 $275,222.22
Net cash inflow –126,888.89 74,777.78 87,333.33 –289,444.44
The short-term financial plan looks like this:
Short-Term Financial Plan
Target cash balance $125,000.00 $125,000.00 $125,000.00 $125,000.00
Net cash inflow –126,888.89 74,777.78 87,333.33 –289,444.44
New short-term investments 0 –73,052.78 –89,213.86 0
Income on short-term investments 1,150.00 0 1,880.53 2,772.67
Beginning short-term investments $115,000.00 $115,000.00 $188,052.78 $277,266.64
CHAPTER 18 C-3
The interest calculations for each quarter and the net cash cost are:
Q1: Excess funds at start of quarter of $115,000.00 earns $1,150.00 in income.
Net cash cost
Q1 $1,150.00
2. If Piepkorn reduces its target cash balance to $100,000, the cash flows each quarter will remain the
same, so they will not be repeated here. The cash balance and short-term financial plan will be:
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $240,000.00 $113,111.11 $187,888.89 $275,222.22
Net cash inflow –126,888.89 74,777.78 87,333.33 –289,444.44
Short-Term Financial Plan
Target cash balance $100,000.00 $100,000.00 $100,000.00 $100,000.00
Net cash inflow –126,888.89 74,777.78 87,333.33 –289,444.44
New short-term investments 0 –76,177.78 –89,495.11 0
Beginning short-term investments $140,000.00 $140,000.00 $216,177.78 $305,672.89
CHAPTER 18 C-4
Q1: Excess funds at start of quarter of $140,000.00 earns $1,400.00 in income.
Net cash cost
Q1 $1,400.00
3. If Piepkorn offers the discounted terms, we must assume the sales will remain unchanged. However,
the effect of the discount will be to reduce the dollars received from the sales by the discount
percentage for the customers who take advantage of the discount. This will change the cash flows
Piepkorn receives. The net sales after the discount each quarter will be:
Q1 net sales = ($1,240,000)(.40)(1 – .01) + $1,240,000(.60)
Q1 net sales = $1,235,000
In addition to the reduction in sales, the collections period will decrease to 36 days. The collections
will be based off the lower sales figures, so the net cash inflows each quarter will be:
CHAPTER 18 C-5
Net Cash Inflow
Q1 Q2 Q3 Q4
A/R at beginning of Q collected $504,000.00 $494,016.00 $521,904.00 $545,808.00
Sales collection in current Q 741,024.00 782,856.00 818,712.00 866,520.00
Purchases last Q paid this Q –289,333.33 –305,666.67 –319,666.67 –338,333.33
So, the cash balance each quarter will be:
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $240,000.00 $344,357.33 $427,229.33 $520,512.00
Net cash inflow 104,357.33 82,872.00 93,282.67 –280,005.33
CHAPTER 18 C-6
The short-term financial plan under these assumptions will be:
Short-Term Financial Plan
Target cash balance $100,000.00 $100,000.00 $100,000.00 $100,000.00
Net cash inflow 104,357.33 82,872.00 93,282.67 –280,005.33
New short-term investments –105,757.33 –85,329.57 –96,593.54 0
Income on short-term investments 1,400.00 2,457.57 3,310.87 4,276.80
Beginning short-term investments $140,000.00 $245,757.33 $331,086.91 $427,680.44
Ending short-term investments 245,757.33 331,086.91 427,680.44 151,951.91
The interest earned each quarter is:
Q1: Excess funds at start of quarter of $140,000.00 earns $1,400.00 in income.
The net cash cost is:
Net cash cost
Q1 $1,400.00
The effective annual rate Piepkorn is offering to its customers is:
CHAPTER 18 C-7
4. In addition to the discount offered to customers, Piepkorn is now offered a discount from suppliers.
However, since the purchases from suppliers are a percentage of sales, we must assume these
purchases are for raw materials, which will not change except for the discount taken. Thus, we will
base the purchases off the gross sales figure. The net cash inflows each quarter will be:
Net Cash Inflow
Q1 Q2 Q3 Q4
A/R at beginning of Q collected $504,000.00 $494,016.00 $521,904.00 $545,808.00
Sales collection in current Q 741,024.00 782,856.00 818,712.00 866,520.00
Purchases last Q paid this Q –103,333.33 –107,529.17 –112,454.17 –119,020.83
So, the cash balance each quarter will be:
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $240,000.00 $342,044.83 $426,116.83 $518,174.50
Net cash inflow 102,044.83 84,072.00 92,057.67 –246,130.33
CHAPTER 18 C-8
The short-term financial plan will be:
Short-Term Financial Plan
Target cash balance $100,000.00 $100,000.00 $100,000.00 $100,000.00
Net cash inflow 102,044.83 84,072.00 92,057.67 –246,130.33
New short-term investments –103,444.83 –86,506.45 –95,357.18 0
Income on short-term investments 1,400.00 2,434.45 3,299.51 4,253.08
Beginning short-term investments $140,000.00 $243,444.83 $329,951.28 $425,308.46
The interest earned each quarter will be:
Q1: Excess funds at start of quarter of $140,000.00 earns $1,400.00 in income.
And the net cash cost will be:
Net cash cost
Q1 $1,400.00
The effective annual rate the company’s suppliers are offering to Piepkorn is: