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# Cash and Receivable Management

1. Robyn Electronics Company currently has annual sales, all credit, of P8 million and an average collection period of 30
days. The current level of bad debt is P240,000 and the company’s opportunity cost or required rate of return is 15%.
The company produces only one product, with variable costs equaling 75% of the selling price. The company is
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considering a change in the credit terms from the current terms of 30 to 30, 60 . If this change is made it is expected
that half of the customers will take the discount and pay on the 30th day, whereas the other half will pass the discount
and pay on the 60th day. This will increase the average collection period from 30 days to 45 days. The major reason
Robyn Electronics Company is considering this change is that it will generate additional sales of P1 million. Although
the sales from these new customers will generate profits, they will also generate more bad debts; however, it is
assumed that the level of bad debts on the original sales will remain constant, and that the level of bad debts on the
new sales will be 6% of those sales. Should the company go ahead with the change in credit policy?
SOLUTION:

1. Estimate the Change in Profit = (Increased sales X Contribution Margin) – (Increased sales X Percent bad debt
losses on sales)
= (P1 million X .25) – (P1 million X .06)
= P190,000

2. Estimate the Cost of Additional Investment in Accounts Receivable = Additional Accounts Receivable X Pre-tax
Required Rate of Return)

= (New Level of Daily Sales X New Average Collection Period) – (Original Level of Daily Sales X Original Average
Collection Period)

𝑃9,000,000 𝑃8,000,000
= X 45 - X 30
360 360

= P458,340 X .15

= P68,751

3. Estimate the Change in the Cost of the Cash Discount = (New Level of Sales X New Percent Cash Discount X
Percent of Taking Discount) – (Original Level of Sales X Original Percent of Cash Discount X Original Percent of
Taking Discount)

## = (P9,000,000 X .01 X .50) – (P8,000,000 X 0 x 0)

= P45,000

4. Compare the Incremental Revenues with the Incremental Costs = Change in Profits – (Cost of New Investment
in Accounts Receivables + Cost of Change in Cash Discount)

## = P190,000 – (P68,751 + P45,000)

= P76,249

2. Robyn and R_____ are examining the following statement of cash flows for Robyn Company for the year ended
December 31, 2009:

ROBYN COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2009
Sources of cash
From sale of merchandise P 370,000
From sale of capital stock 420,000
From sale of investment (purchased below) 80,000
From depreciation 55,000
From issuance of note for truck 20,000
From interest on investment 6,000
TOTAL SOURCES OF CASH P 951,000

Uses of Cash
For purchase of fixtures and equipment 340,000
For merchandise purchased for resale 258,000
For operating expenses (including depreciation) 160,000
For purchase of investment 75,000
For purchase of truck by issuance of note 20,000
For purchase of treasury stock 10,000
For interest on note payable 3,000
TOTAL USES OF CASH 866,000
NET INCREASE IN CASH P 85,000

Robyn claims that Robyn’s statement of cash flows is an excellent portrayal of a superb first year with cash
increasing P85,000. R______ replies that it was not a superb first year. Rather, he says, the year was an operating failure,
that the statement is presented incorrectly, and that P85,000 is not the actual increase in cash. The cash balance in
beginning of the year was P140,000.

INSTRUCTIONS: With whom do you agree? Explain your answer by preparing the statement of cash flows in proper form
and using the indirect method. The only noncash items in the income statement are depreciation and the gain from sale
of the investment.
SOLUTION:
(a) From the information given, it appears that from an operating standpoint, Robyn Company did not have
a superb first year, having suffered a P40,000 net loss [see computation at end of part (b)]. R____ is
correct; the statement of cash flows is not prepared in correct form. The sources and uses format is no
longer the acceptable form. The correct format classifies cash flows from three activities—operating,
investing, and financing; and it also presents significant noncash investing and financing activities in a
separate schedule. Robyn is wrong, however, about the actual increase in cash not being P85,000;
P85,000 is the correct increase in cash.
(b) Cash flows from operating activities
Net loss (40,000)*
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense 55,000
Gain from sale of investment........... (5,000) 50,000
Net cash provided by operating activities 10,000

## Cash flows from investing activities

Sale of investment 80,000
Purchase of fixtures and equipment (340,000)
Purchase of investment (75,000)
Net cash used by investing activities (335,000)*

## Cash flows from financing activities

Sale of capital stock 420,000
Purchase of treasury stock (10,000)
Net cash provided by financing activities 410,000

## Net increase in cash 85,000

Cash at beginning of period 140,000
Cash at end of period 225,000

## Noncash investing and financing activities

Issuance of note for truck 20,000

## (c) Computation of net income (loss)

Sales of merchandise 370,000
Interest revenue 6,000
Gain on sale of investment (P80,000 – P75,000) 5,000
Total revenues and gains 381,000
Merchandise purchased (258,000)
Operating expenses (P160,000 – P55,000) (105,000)
Depreciation (55,000)
Interest expense (3,000)
Net loss (40,000)

3. Robyn Company has generated P2 million in excess of cash that it could invest in marketable securities. In order to
buy and sell the securities, the firm will pay total transactions fees of P45,000. Would you recommend purchasing the
securities if they yield 12% annually and are held for (1) One month? (2) Two months? (3) Three months? (4) Six
months? (5) One year?
SOLUTION:
Recommendation
1. P2,000,000 (.12)(1/12) = P20,000 < P45,000 No
2. P2,000,000 (.12)(2/12) = P40,000 < P45,000 No
3. P2,000,000 (.12)(3/12) = P60,000 > P45,000 Yes
4. P2,000,000 (.12)(6/12) = P120,000 > P45,000 Yes
5. P2,000,000 (.12) = P240,000 > P45,000 Yes