91Ó°ÊÓ

Game Guys is a retail store selling video games. Sales are uniform for most of the year, but pick up in June and December, both because new releases come out and because games are purchased in anticipation of summer or winter holidays. Game Guys also sells and repairs game systems. The forecast of sales and service revenue for the second quarter of 2012 is as follows: Almost all the service revenue is paid for by bank credit card, so Game Guys budgets this as \(100 \%\) bank card revenue. The bank cards charge an average fee of \(3 \%\) of the total. Half of the sales revenue is also paid for by bank credit card, for which the fee is also \(3 \%\) on average. About \(10 \%\) of the sales are paid in cash, and the rest (the remaining \(40 \%\) ) are carried on a store account. Although the store tries to give store credit only to the best customers, it still averages about \(2 \%\) for uncollectible accounts; \(90 \%\) of store accounts are paid in the month following the purchase, and \(8 \%\) are paid two months after purchase. 1\. Calculate the cash that Game Guys expects to collect in May and in June of 2012 . Show calculations for each month. 2\. Game Guys has budgeted expenditures for May of \(\$ 4,350\) for the purchase of games and game systems, \(\$ 1,400\) for rent and utilities and other costs, and \(\$ 1,000\) in wages for the two part time employees. a. Given your answer to requirement 1 , will Game Guys be able to cover its payments for May? b. The projections for May are a budget. Assume (independently for each situation) that May revenues might also be \(5 \%\) less and \(10 \%\) less, and that costs might be \(8 \%\) higher. Under each of those three scenarios show the total net cash for May and the amount Game Guys would have to borrow if cash receipts are less than cash payments. Assume the beginning cash balance for May is \(\$ 100\). 3\. Suppose the costs for May are as described in requirement 2, but the expected cash receipts for May are \(\$ 6,200\) and beginning cash balance is \(\$ 100 .\) Game Guys has the opportunity to purchase the games and game systems on account in May, but the supplier offers the company credit terms of \(2 / 10\) net \(30,\) which means if Game Guys pays within 10 days (in May) it will get a \(2 \%\) discount on the price of the merchandise. Game Guys can borrow money at a rate of \(24 \%\). Should Game Guys take the purchase discount?

Step by step solution

01

Understand Sales Revenue Collection

Identify how and when Game Guys collects its sales and service revenue. Service revenue is 100% paid via bank card with a 3% fee. Sales revenue is 50% via bank card (3% fee), 10% in cash, and 40% as store credit. Uncollectible accounts are 2%, 90% of store credits are paid the following month, and 8% two months after purchase.

02

May's Cash Collections

Calculate cash collections for May. Include: 100% of service revenue minus a 3% bank card fee; 50% of sales revenue minus a 3% bank card fee; 10% of sales revenue as cash; and 90% of store credit sales from April (the previous month) multiplied by 0.98 to account for uncollectibles, and 8% from March.

03

June's Cash Collections

Determine cash collections for June, using the same proportions as in May. Factors include service revenue (-3% fee), sales revenue (-3% fee, 10% cash), and collecting 90% of store credit sales from May, adjusted for uncollectibles, plus 8% from April and 2% uncollectible.

04

Analyze May Expenses

Sum the budgeted May expenses: $4,350 for purchases, $1,400 for rent and utilities, and $1,000 for wages. Compare the total to May's expected cash collections to determine if expenses are covered.

05

Evaluate Alternative Scenarios for May

Adjust cash collections for potential decreases in revenue (5% and 10% less) and increases in expenses (8% more costs). Calculate the net cash for each scenario starting with a $100 cash balance. Determine the shortfall and necessary borrowing if any.

06

Decision on Supplier Discount

Examine if Game Guys should take a 2% supplier discount for early payment at the expense of borrowing at a 24% annual interest rate. Compare the cost of borrowing to the savings from the discount to make a decision.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cash Flow Analysis

Cash flow analysis is a critical step in budgeting and cost accounting. It involves assessing the inflows and outflows of cash to ensure that a business can meet its financial obligations. For Game Guys, understanding the timing of cash movements can help avoid liquidity issues. Cash inflows for Game Guys comprise different types of sales and services revenues. The inflows need to be analyzed in detail:

• Service revenue collected entirely through bank cards, subject to a transaction fee.
• Sales revenue divided among credit card payments, cash, and store credits.

Additionally, managing cash flow requires understanding payouts for expenses, such as purchases, utilities, and wages. A shortfall indicates the need for additional cash resources or adjusting spending. By conducting cash flow analysis, Game Guys can better forecast its ability to cover upcoming expenses and plan for various financial scenarios.

Sales Revenue Collection

The collection of sales revenue is a nuanced process. In Game Guys' scenario, this means breaking down how revenue is received, categorized, and adjusted for fees or losses. Key components:

• Bank credit card payments make up a significant portion but include a 3% bank fee, reducing the effective collection.
• 10% of sales are collected in cash, offering a straightforward addition to cash flow.
• Store credit accounts make up 40% of transactions, with their payments staggered over upcoming months, affecting cash flow timing.

Understanding each component helps predict when cash will actually be available, which is crucial for meeting financial obligations on time. Proper management of revenue collection improves operational efficiency and financial stability.

Expenditure Forecasting

Expenditure forecasting involves predicting future costs to ensure that a business can plan its finances accordingly. For Game Guys, this means calculating expected expenses such as purchases, rent, utilities, and wages. An accurate forecast comprises:

• Budget amounts for fixed and variable costs, like the $4,350 for purchases.
• Predicted increases in costs, which may occur due to market fluctuations, such as an 8% cost increase.

Evaluating different scenarios, such as increased expenses or decreased revenues, helps the business prepare for various potential financial situations. Effective forecasting allows for strategic budgeting and financial planning, reducing the risk of unexpected shortfalls.

Discount Strategy Evaluation

Evaluating discount strategies is about analyzing whether to take advantage of financial benefits like early payment discounts. For Game Guys, a key decision is whether to leverage a 2% supplier discount against the cost of borrowing at a 24% annual interest rate. Considerations include:

• The net savings from the discount compared to the expense of borrowing. The discount can provide immediate cost benefits if it outweighs the loan interest over the discount period.
• The impact on cash flows and whether Game Guys can sustain the temporary cash outflow needed to capitalize on the discount.

Making informed discount strategy decisions can improve profit margins and foster better supplier relationships. It's crucial to weigh long-term financial impacts against immediate costs and benefits.