Question

The Pat Company has estimated its activity for May 2020. Selected data from these estimated amounts are as follows:

Sales $350,000

Gross Profit (based on sales) 30%

Increase in trade A/R during May $10,000

Change in A/P during May $0

Increase in inventory during May $5,000

Variable selling and administrative expenses includes a charge for uncollectible accounts of 1% of sales. Depreciation expense of $20,000 per month is included in fixed selling and administrative expenses.

What are the estimated cash receipts from operations for May?

Select one:

a. $ 350,000

b. $ 360,000

c. $ 340,000

d. $ 336,500

Answer 1

The sales for the period are $ 350,000.

30% of sales is Gross Profit which comes to $ 105,000.

The question requires us to calculate the cash receipts from operations during the month of May.

The Trade A/R has increased by $ 10,000. This means that Accounts Receivable has increased and that means that kuch amount will be less collected from sale made.

Thus, $ 10,000 will be reduced from total sales as this amount is yet to be recovered.

Their has been no change in A/P. Thus, it will not affect the cash receipts.

Inventory has increased by $ 5,000. But their has been no change in A/P. This means that inventory change will not affect the cash receipts.

1% of sales is considered to be bad debts and such amount will be uncollectible.

1% of $ 350,000 = $ 3,500 will be uncollectible.

Depreciation being no cash expenditure will not affect the cash receipts.

Thus cash receipts for month of May -

Cash sales - Increase in A/R - Bad debts

= $ 350,000 - $ 10,000 - $ 3,500

= $ 336,500

OPTION D