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 S10 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 S110 and $125, respectively, while purchases amount to 80% of next quarter's forecasted sales. The account payable period is 90 days (1 quarter). (i) Determine whether the firm has a cash surplus or deficit for the first quarter. m the beginning accounts second quarter.

Explanation / Answer

(i).

Beginning cash balance

$20

Add: Cash collected

$35

Add: Cash collected ($110 * 25 / 90)

$30.56

Total cash

$85.56

Less: Cash disbursement ($110 * .8)

($88)

Less: Minimum required cash balance

($10)

Cash deficit

$12.44

Thus it is clear that there is a cash deficit.

(ii).

Beginning accounts receivable for second quarter;

($110 * 65 / 90) = $79.44

Cash collection for second quarter will be calculated as follow;

Add: Cash collected

$79.44

Add: Cash collected ($125 * 25 / 90)

$34.72

Total cash collection

$114.16

Beginning cash balance

$20

Add: Cash collected

$35

Add: Cash collected ($110 * 25 / 90)

$30.56

Total cash

$85.56

Less: Cash disbursement ($110 * .8)

($88)

Less: Minimum required cash balance

($10)

Cash deficit

$12.44

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