Question

Papst Company is preparing its cash budget for the month of May. The following information is available concerning its accounts receivable (based on sales made to customers on open account):

Actual credit sales for March	$	130,000
Actual credit sales for April	$	160,000
Estimated credit sales for May	$	210,000
Estimated collections in the month of sale		25	%
Estimated collections in the first month after the month of sale		60	%
Estimated collections in the second month after the month of sale		10	%
Estimated provision for bad debts (made in the month of sale)		5	%

The firm writes off all uncollectible accounts at the end of the second month after the month of sale.

Required:

Determine for Papst Company for the month of May:

1. The estimated cash receipts from accounts receivable collections.

2. The gross amount of accounts receivable at the end of the month (after appropriate write-off of uncollectible accounts).

3. The net amount of accounts receivable at the end of the month.

4. Recalculate requirements 1 and 2 under the assumption that estimated collections in the month of sale equal 60% and in the first month following the month of sale equal 25%

5. What are the benefits and likely costs of moving to the situation described in requirement 4?

Answer 1

Answer:-

Given Data
		Actual credit sales for March		$130,000
		Actual credit sales for April		$160,000
		Estimated credit sales for May		$210,000
		Estimated collections in month of sale	25%
		Estimated collections in first month following month of sale	60%
		Estimated collections in the second month after month of sale	10%
		Estimated provision for bad debts in month of sale	5%
Answer
1)	The estimated cash receipts in May from collection of accounts receivable:
		Collection from sales in March (0.10 × $130,000)	$13,000
		Collection from sales in April (0.60 × $160,000)	$96,000
		Collection from sales in May (0.25 × $210,000)	$52,500
			Total cash collections in May	$161,500
2)	Gross accounts receivable, May 31st (after appropriate write-off of uncollectible accounts):
		From credit sales made in April (0.15 × $160,000)	$24,000
		From credit sales made in May (0.75 × $210,000)	$157,500
			Gross accounts receivable, May 31st	$181,500
3)	Net accounts receivable, May 31st:
		Gross accounts receivable, May 31st (from (2) above)	$181,500
		Less: Allowance for uncollectible accounts:
		From credit sales made in April (0.05 × $160,000)	$8,000
		From credit sales made in May (0.05 × $210,000)	$10,500
		Net accounts receivable, May 31st	$163,000
4)	Revised data/assumptions:
		Actual credit sales for March		$130,000
		Actual credit sales for April		$160,000
		Estimated credit sales for May		$210,000
		Estimated collections in month of sale	60%
		Estimated collections in first month following month of sale	25%
		Estimated collections in the second month after month of sale	10%
		Estimated provision for bad debts in month of sale	5%
		a. Estimated cash receipts from collections in May:
		Collection from sales in March (0.10 × $130,000)	$13,000
		Collection from sales in April (0.25 × $160,000)	$40,000
		Collection from sales in May (0.60 × $210,000)	$126,000
			Total cash collections in May	$179,000
		b. Gross accounts receivable, May 31st (after appropriate write-off of uncollectible accounts):
		From credit sales made in April (0.15 × $160,000)	$24,000
		From credit sales made in May (0.40 × $210,000)	$84,000
			Gross accounts receivable, May 31st	$108,000
5. The principal benefit is the accelerated receipt of cash, which the company can potentially employ to pay down debt, reduce
borrowing, invest, etc. Principal costs would relate to whatever programs are needed to secure the accelerated collection of
cash. These costs could include personnel, travel, mailings, telephone, incentive programs, and costs related to customer
relations.