Question

. Below is information about actual sales of a product for June and July and the expected sales of August, September and October. Selling price for the product is $100.

June $230,000, July $240,000, August $220,000, September $280,000 and October $310,000. November $340,000

Costs of Goods Sold equals to 70% of Sales. The end of inventory policy is 40% of the next month of quantity sales.  

Inventory is purchased on continuous basis during the month. 60% of inventory costs are paid in the month of purchases, and 40% is paid in the following month.  

1-1 Calculate the expected purchases (units) for August and September:

            

1-2 Calculate the budgeted cash payments for August and September, assuming only payment arises from the above purchases.  

            

1-3 Cash collection Company’s cash collection policy is as follows.

60% of sales is collected in the month of sales

30% of sales is collected in the one month after the sales

8% of sales is collected in the two months after sales.

2% is generally never collected.   

Compute the expected cash collection for August, September and October.    

1-4 The company expects to have a big cash payment in October and wants to keep cash balance at the beginning for $120,000.  If cash payment and receive are only above for August and September, Do the company have enough cash at the beginning of October?  Cleraly show your calculations.

Answer 1

1. Calculation of expected purchases (units) for August and September:

	August	September
Sales	$220,000	$280,000
Purchases / Cost of Goods Sold (70% of sales)	$154,000 ($220,000 * 70%)	$196,000 ($280,000 * 70%)

2. Calculation of budgeted cash payments for August and September, payment arises from the above purchases:

	June	July	August	September	October
Sales	$230,000	$240,000	$220,000	$280,000	$310,000
Purchases / Cost of Goods Sold (70% of sales)	$161,000	$168,000	$154,000	$196,000	$217,000
Cash payment for Purchases:
June	$96,600 ($161,600 * 60%)	$64,400 ($161,600 * 40%)
July		$100,800 ($168,000 * 60%)	$67,200 ($168,000 * 40%)
August			$92,400 ($154,000 * 60%)	$61,600 ($154,000 * 40%)
September				$117,600 ($196,000 * 60%)	$78,400 ($196,000 * 40%)
Total cash payments	$96,600	$165,200	$159,600	$179,200

3. Statement of expected cash collections:

	June	July	August	September	October	November	December
Sales	$230,000	$240,000	$220,000	$280,000	$310,000	$340,000
Cash collections:
a. June cash collections	$138,000 ($230,000 * 60%)	$69,000 (230,000 * 30%)	$18,400 ($230,000 * 8%)
b. July cash collections		$144,000 ($240,000 * 60%)	$72,000 ($240,000 *30%)	$19,200 ($240,000 * 8%)
c. August cash collections			$132,000 ($220,000 * 60%)	$66,000 ($220,000 * 30%)	$17,600 ($220,000 * 8%)
d. September cash collections				$168,000 ($280,000 * 60%)	$84,000 ($280,000 * 30%)	$22,400 ($280,000 * 8%)
e. October cash collections					$186,000 ($310,000 * 60%)	$93,000 ($310,000 * 30%)	$24,800 ($310,000 * 8%)
f. Total Cash Collections (a+b+c+d+e)	$138,000	$213,000	$222,400	$253,200	$287,600	$115,400	$24,800

4. Statement showing availability of cash at the end of September:

	August	September
a. Opening Cash balance	$0	$62,800
b. Cash Receipts	$222,400	$253,200
c. Cash Payments for purchases	$159,600	$179,200
d. Closing cash balance	$62,800	$136,800

Conclusion: From the above we can observe that the cash balance at the end of the September is $136,800 which is sufficient to meet the requirement of big cash payment ($120,000).

Hence the company has enough cash balance at the beginning of October.