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 $340,000 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 $173,500, all of which will be paid in December.

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

Note 1 October November December Cash Sales (A) 69400 88400 96800 Sales on account 445000 596000 625000 Collection same month - 20% 89000 119200 125000 following month - 60% 267000 357600 second month -18% 80100 Collection for december (B) 562700 Total collection ( A + B) 659500 Note 2 Purchase of inventory 340000 Paid in December - 30% 102000 Paid for November 173500 Total payment for purchases 275500 December Cash Budget opening balance 55400 Collections ( see Note 1) 659500 Total Cash available 714900 Less Payment for inventory ( Note 2) 275500 selling and administration expenses ( 510000 - 55100) 454900 purchase of web server 83000 Dividends paid 18500 Total cash payments 831900 Cash shortfall -117000 Line of credit utilised ( note 3) 137000 closing balance 20000 Note 3 Cash shortfall -117000 Minimum cash balance required 20000 Total shortfall to be covered from line of credit -137000 Hence line of credit utilisation 137000

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