Sales on account are collected over a three-month period as follows: 20% collect

Question

   

Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible.

Purchases of inventory will total $285,000 for December. Thirty percent of a month’s inventory purchases are paid during the month of purchase. The accounts payable remaining from November’s inventory purchases total $185,000, all of which will be paid in December.

  

  

Prepare a schedule of expected cash disbursements for merchandise purchases for December.

  

  

Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month

You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations:

Explanation / Answer

1) Schedule of Expected Cash Collections for December (Amounts in $)

2) Schedule of Expected Cash Disbursements for Purchases (Amts in $)

3) Cash Budget for December (Amounts in $)

Total borrowing needed will be equal to sum of cash needed to maintain minimum balance of $20,000 and cash needed to cover the decrease in cash of $54,000.

Thus total borrowing needed = Minimum Cash + Decrease in Cash

= $20,000+$54,000 = $74,000

Cash Sales 96,200 Collection for the month of: December (20% of credit sales i.e. $684,000) 136,800 November (60% of Credit sales i.e. $512,000) 307,200 October (18% of Credit sales i.e. $495,000) 89,100 Total Cash Collections 629,300

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