Wednesday 1 April 2015

Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales occur in May of each year, as shown in the company’s sales budget for the second quarter given below:

Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales occur in May of each year, as shown in the company’s sales budget for the second quarter given below:


April May June Total
  Budgeted sales (all on account) $440,000     $640,000     $220,000     $1,300,000  



     From past experience, the company has learned that 30% of a month’s sales are collected in the month of sale, another 60% are collected in the month following sale, and the remaining 10% are collected in the second month following sale. Bad debts are negligible and can be ignored. February sales totaled $370,000, and March sales totaled $400,000.


Required:
1.
Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter.
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Explanation:
1.
April May June Total
  February sales: $370,000 × 10% $ 37,000    $ 37,000   
  March sales: $400,000 × 60%, 10% 240,000    $ 40,000    280,000   
  April sales: $440,000 × 30%, 60%, 10% 132,000    264,000    $ 44,000    440,000   
  May sales: $640,000 × 30%, 60% 192,000    384,000    576,000   
  June sales: $220,000 × 30% 66,000    66,000   








  Total cash collections $ 409,000    $ 496,000    $ 494,000    $ 1,399,000   



















Notice that even though sales peak in May, cash collections peak in June. This occurs because the bulk of the company’s customers pay in the month following sale. The lag in collections that this creates is even more pronounced in some companies. Indeed, it is not unusual for a company to have the least cash available in the months when sales are greatest.

2.
Accounts receivable at June 30:

From May sales: $640,000 × 10% = $64,000
From June sales: $220,000 × (60% + 10%) = $154,000

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