Question

Budgeted Cash Collections, Budgeted Cash Payments

Historically, Ragman Company has had no significant bad debt experience with its customers. Cash sales have accounted for 20 percent of total sales, and payments for credit sales have been received as follows:

40 percent of credit sales in the month of the sale
35 percent of credit sales in the first subsequent month
20 percent of credit sales in the second subsequent month
5 percent of credit sales in the third subsequent month

The forecast for both cash and credit sales is as follows.

January	$185,000
February	184,000
March	193,000
April	195,000
May	220,000

Required:

1. What is the forecasted cash inflow for Ragman Company for May?
$

2. Due to deteriorating economic conditions, Ragman Company has now decided that its cash forecast should include a bad debt adjustment of 2 percent of credit sales, beginning with sales for the month of April. Because of this policy change, what will happen to the total expected cash inflow related to sales made in April? (CMA adapted)

Cash will    by $.

Answer 1

Solution 1:

While preparing cash forecast for May, credit sales from february to April will also be realized in part.

Solution 2:

If Ragman company creates a bad- debt adjustment of 2% of credit sales, it will reduce the cash forecast .

Total Sales of April = $195,000

Credit Sales = 80%

Total Credit Sales = $195,000 * 80% = $156,000

If the company creates the provision in the month of april while preparing the budget, it will create a bad-debt provision of $156,000 * 2% = $3,120

Total Expected cash inflow will reduce by $3,120 due to adjustment of provisioning for bad-debt.