22. A firm has an average collection period of 25 days. It has a policy of keepi

Question

22. A firm has an average collection period of 25 days. It has a policy of keeping at least $10 on hand as minimum cash balance, and has a beginning cash balance for the first quarter of $20. Beginning receivables for the first quarter amount to $35. Sales for the first and second quarters are expected to be $110 and $125. respectively, while purchases amount to 80% of next quarter's forecasted sales. The account payable period is 90 days (1 quarter) a cash surplus or deficit for the first quarter. (ii) Write down the beginning accounts receivable and calculate cash collections for the second quarter.

Explanation / Answer

i) Cash Surplus / Deficit : beginning balance + cash collections - cash disbursements - Minimum required cash balance = $20 + [35 + (110 * 65 / 90) ] - ( 110 * 80%) - $10 = $20 + 114.44 - 88 - 10 = $36.44

ii) 2nd quarter beginning balance = 25 days of previous quarter = (110 * 25 / 90) = $30.56

2nd quarter cash collections = beginning receivables + quarters sales collection = 30.56 + (125 * 25/90) = $120.84

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