Question

Silver Company makes a product that is very popular as a Mother's Day gift. Thus, peak sales occur in May of each year, as shown in the company's sales budget for the second quarter given below:

April May June Total
Budgeted sales (all on account) $ 300,000 $ 500,000 $200,000 $ 1,000,000

From past experience, the company has learned that 20% of a month's sales are collected in the month of sale, another 70% are collected in the month following sale, and the remaining 10% are collected in the second month following sale. Bad debts are negligible and can be ignored. February sales totaled $230,000, and March sales totaled $260,000.

Requirement 1:

Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter.

Requirement 2:

Assume that the company will prepare a budgeted balance sheet as of June 30. Compute the accounts receivable as of that date.

Answer 1

Concepts and reason

Financial budget: This budget depicts the capital requirement that is needed in the short run and long run of the company at various period of time. The main objective of the financial budget is to make certain the supply of required funds in the firm at right period. An important part of financial budget is preparation of cash budget.

Cash budget: Cash budget is an estimation of cash receipts and cash payments made during a particular period. The cash budget includes all the expected cash inflows such as sale of common stock and bonds and cash disbursements made in a particular period.

Cash receipts: It is the cash receipt of the company in a particular period. Cash collection from customers is the example of cash receipts.

Cash disbursements: It is the cash payment made by the company in a particular period. Payments to creditors, payments to bank etc. are the examples of cash disbursement.

Fundamentals

Schedule of expected cash collections: Budgeted cash collection is an estimation of cash collections from the sales.

Sales revenue: Sales revenue is the total income earned by a company by selling goods or rendering services.

Accounts receivable: Accounts receivable is the current asset of the company. Accounts receivables are born at the time of credit sales. It is the amount owed by the customers to the company.

(1)

The expected cash collection is calculated as follows:

Therefore, Cash collection for April month is $265,000, May month is $336,000 and June month is $420,000 respectively.

Working notes:

(2)

The Accounts receivable balance as on June 30 is calculated as follows:

Hence, Total accounts receivable is $210,000.

Working Note:

Ans: Part 1

Total cash collection for April is $265,000 & for May is $336,000 & for June is $420,000 respectively.

Part 2

Total accounts receivable at June 30 is $210,000