Question

Jack and Jills, a retail business, has supplied the following information in relation to their actual sales in 2017 and planned sales for the first quarter of 2018.

                                                                                                  Cash         Credit                                               Total

                                                                                                          $                    $                                                   $

2017 Actual Sales for                      November       25,000        25,000                                               50,000

                                                        December       35,000        40,000                                               75,000

2018 Estimated Sales for January          15,000        20,000 35,000

                                                        February        18,000 30,000 48,000

March            22,000        40,000    62,000

Past records indicate that expected receipts collected from debtors will be:

              60% in the month of sale

              40% in the month following the sale

TASK

1. What is the projected cash inflow from debtors in both January and February? (8 points)[show your working clearly]
2. What is the total cash expected to be collected from all sales in March? (6 points) [show your working clearly]
3. Based on your answers above, explain how the preparation of a cash budget could assist a company to identify short-term problems. (10 points)

Answer 1

Answer :

1. The projected cash inflow from debtors in both January and February are as follows :

January

= 40% of December credit sales + 60% of January credit sales

= (40% x $40,000) + (60% x $20,000)

= $16,000 + $12,000

= $28,000

February

= 40% of January credit sales + 60% of February credit sales

= (40% x $20,000) + (60% x $30,000)

= $8,000 + $18,000

= $26,000

2. The total cash expected to be collected from all sales in March :

Total cash collected in March

= 40% of February credit sales + 60% of March credit sales + Cash sales

= (40% x $30,000) + (60% x $40,000) + $22,000

= $12,000 + $24,000 + $22,000

= $58,000

3. The preparation of a cash budget assist a company to identify their short-term problems in following ways :

• it helps in planning for strategic decisions.
• it provides clear cash position of company.
• helps to avoid shotages of cash for day to day operations.
• helps to identify whether company needs any short term borrowings or long term borrowings.
• helps in identifying or deciding credit period of sales.