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)	$400,000	$600,000	$190,000	$1,190,000

From past experience, the company has learned that 30% of a month's sales are collected in the month of sale, another 60% are collected in the month following the sale, and the remaining 10% are collected in the second month following the sale. Bad debts are negligible and can be ignored. February sales totaled $330,000, and March sales totaled $360,000.

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

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

Sales Budget

A sales budget is a plan prepared by the management to estimate the revenue generation of a company in a specific time period. It can be prepared in terms of the number of units to be sold or in terms of revenue generation. It is essential for the management to know the forecast of revenues to develop strategies and run the business efficiently.

Answer 1

To illustrate the problem, let us consider the table below. It shows the total sales collection monthly in relation to the monthly percentage collection (30%, 60%, and 10%) as defined by the company.

 

	February	March	April	May	June	July	August	Total
Budgeted sales	330,000	360,000	400,000	600,000	190,000			1,880,000
Percentage of collection in February	30%	60%	10%
Sales of February	99,000	198,000	33,000					330,000
Percentage of collection in March		30%	60%	10%
Sales of March		108,000	216,000	36,000				360,000
Percentage of collection in April			30%	60%	10%
Sales of April			120,000	240,000	40,000			400,000
Percentage of collection in May				30%	60%	10%
Sales of May				180,000	360,000	60,000		600,000
Percentage of collection in June					30%	60%	10%
Sales of June					57,000	114,000	19,000	190,000
TOTAL MONTHLY CASH COLLECTIONS	99,000	306,000	369,000	456,000	457,000	174,000	19,000	1,880,000

• The total monthly sales, presented horizontally, was computed by multiplying the percentages with the budgeted sales of the month.
• The total monthly cash collections, presented vertically, was computed by summing up all the cash collections made by the company per month.

Now that we have computed for the monthly total collections, we may now prepare the requirements of the problem.

1. Schedule of expected cash collections from sales, by month and in total, for the second quarter

 

Month	Cash collections
April	$369,000
May	$456,000
June	$457,000
TOTAL	$1,282,000

Note that the expected cash collection is also equal to the total cash collections we have calculated in the table above.

 

2. Accounts receivable as of June 30

Here are the percentage allocation of the monthly sales of Silver Company:

• 30% = collected in the month of sale
• 60% = collected in the following month
• 10% = collected in the second following month

Since we were asked for the amount of accounts receivables as of June 30, we can add the cash to be collected in July and August.

$$\begin{array}{cc}\text{Accounts Receivables}& \text{= (Budgeted Sales in June}\times 60\%)\text{+ (Budgeted Sales in June}\times 10\%)\\ & =(190,000\times 60\%)+(190,000\times 10\%)\\ & =114,000+19,000\\ & =133,000\end{array}$$

 

Therefore, the accounts receivables as of June 30 is $133,000.