All sales are on credit. Recent experience shows that 28% of credit sales is col
ID: 2425367 • Letter: A
Question
All sales are on credit. Recent experience shows that 28% of credit sales is collected in the month of the sale, 42% in the month after the sale, 25% in the second month after the sale, and 5% proves to be uncollectible. The product’s purchase price is $110 per unit. All purchases are payable within 13 days. Thus, 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 21% of the next month’s unit sales plus a safety stock of 185 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,548,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $100,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $100,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 11% interest rate. On May 31, the loan balance is $41,000, and the company’s cash balance is $100,000. (Round final answers to the nearest whole dollar.) Prepare a table that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July Prepare a table that shows the computation of budgeted ending inventories (in units) for April, May, June, and July Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month. Prepare a table showing the computation of cash payments on product purchases for June and July. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month. (Do not round intermediate calculations.)
Units Dollars April (actual) 5,500 $1,100,000 May (actual) 3,600 720,000 June (budgeted) 8,000 1,600,000 July (budgeted) 6,500 1,300,000 August (budgeted) 4,500 900,000Explanation / Answer
computation of cash collections of its credit sales Cash collection of credit sales Jun ($) July ($) 28% of credit sales for the month 448000 364000 42% of the sales for the previous month 302400 672000 25% of credit sales for the month befor the previous month 275000 180000 1025400 1216000 computation of budgeted ending inventories (in units) April May Jun July 21% of next month selling units. 756 1680 1365 945 Safety stock 185 185 185 185 budgeted ending inventories 941 1865 1550 1130 purchases budget May ($) Jun ($) July ($) 79% of selling unit for the month@ $ 110 312840 695200 564850 Ending inventories@ $ 110 205150 170500 124300 Total Budgeted purchases 517990 865700 689150 Dollar amount of purchases 60% of the purchases for the month 310794 519420 413490 40% of the purchases for the previous month 232584 207196 346280 Total Dollar amount of purchases 543378 726616 759770