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.   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