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	183,000
March	193,000
April	195,000
May	200,000

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

1.

	Total sales	Cash sales	Credit sales
January	$185,000	185,000 x 20% = 37,000	185,000 - 37,000 = 148,000
February	183,000	183,000 x 20% = 36,600	183,000 - 36,600 = 146,400
March	193,000	193,000 x 20% = 38,600	193,000 - 38,600 = 154,400
April	195,000	195,000 x 20% = 39,000	195,000 - 39,000 = 156,000
May	200,000	200,000 x 20% = 40,000	200,000 - 40,000 = 160,000

Cash sales	40,000
From the credit sales of February	146,400 x 5% = 7,320
From the credit sales of March	154,400 x 20% = 30,880
From the credit sales of April	156,000 x 35% = 54,600
From the credit sales of May	160,000 x 40% = 64,000
Total cash receipts	$196,800

Forecasted cash inflow for Ragman Company for May = $196,800

2.

bad debt adjustment = 2 percent of credit sales,

Credit sales for April = $156,000

Bad debt = 156,000 x 2%

= $3,120

Cash will decrease by $3,120

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