Question

Logan Township acquired its water system from a private company on June 1. No receivables were acquired with the purchase. Therefore, total accounts receivable on June 1 had a zero balance.

Logan plans to bill customers during the month of sale, and 70% of the resulting billings will be collected during the same month. 90% of the remaining balance should be collectable in the next following month. The remaining uncollectible amounts will relate to citizens who have moved away. Such amounts are never expected to be collected and will be written off.

Water sales during June are estimated at $3,000,000 and remain the same in July and August.

Estimate the monthly cash collections for August. An example for June and July follows:

June	July	August
$3,000,000 X .7 = $2,100,000 (June receivables collected in June). This leaves $900,000 yet to be collected.	$3,000,000 X .7 = $2,100,000 (July billings collected in July). In addition, 90% of June’s uncollected receivables will be collected: $900,000 X .9 = $810,000. $2,100,000 + $810,000 = $2,910,000 will be collected in July. ($90,000 will never be collected)

Without performing calculations, how would the answer change if Logan bills customers in the month following the month of sale?

Answer 1

Estimate cash collection for the month of August

Schedule for Cash collection
Particulars	August
(A) Sales (in $) (see sales given in problem)	$3,000,000
Expected collection
a) 70% in the month of Sale (70% X A)	$2,100,000
b) 90% in the month of following sale (refer note 1)	$   810,000
b) 3% (i.e. 10% X 30%) uncollectible	$             -
Total monthly disbursements	$2,910,000
Total collection for the month of August	$2,910,000
Note 1	August
Previous months sales	$3,000,000
27% (i.e. 90% X 30%) collection in subsequent month	$   810,000

b) If the Company bills in the following month then 70% of the amount collected in the month of billing will be foregone. This will opportunity cost and increase liquidity crisis in the company. In other words, One month working of the company will be forever blocked.