ABC Trading company over the years has come to the conclusion that their Account
ID: 2722646 • Letter: A
Question
ABC Trading company over the years has come to the conclusion that their Accounts Receivable collection experience has on average taking the format of 35-40-20-5. That is, whenever they make credit sales 35% Is collected within 30 days fin the first month), 40% is collected within 60days {in the second month)20% is collected within 90days (in the third month) and the remainder 5% is collected within 120 days Iin the fourth month). If ABC had credit sales of $500,000 in January, $400,000 in February, $150,000 in March and 50,000 in April. How long is this company's Accounts Receivable period? How much total cash will be available in April? Assume that all of ABC's sales are allon credit. if ABC hired a new Accounts receivable manager whose record shows a collection pattern of 70-20-10 Should this person be fired or given a raise?Explanation / Answer
MONTH
JANUARY
FEBRUARY
MARCH
APRIL
MAY
JUNE
JULY
SALES IN $
5,00,000
4,00,000
1,50,000
50,000
OLD COLLECTION TYPE
35-40-20-5
COLLECTION OF SALE
JAN
1,75,000
2,00,000
1,00,000
25,000
COLLECTION OF SALE
FEB
1,40,000
1,60,000
80,000
20,000
COLLECTION OF SALE
MAR
52,500
60,000
30,000
7,500
COLLECTION OF SALE
APR
17,500
20,000
10,000
2,500
Total
6,75,000
7,40,000
4,62,500
2,32,500
70,000
17,500
2,500
MONTH
JANUARY
FEBRUARY
MARCH
APRIL
MAY
JUNE
JULY
New COLLECTION TYPE
70-20-10
SALES IN $
5,00,000
4,00,000
1,50,000
50,000
COLLECTION OF SALE
JAN
3,50,000
1,00,000
50,000
COLLECTION OF SALE
FEB
2,80,000
80,000
40,000
20,000
COLLECTION OF SALE
MAR
1,05,000
30,000
15,000
COLLECTION OF SALE
APR
35,000
10,000
5,000
Total
8,50,000
7,80,000
3,85,000
1,55,000
45,000
5,000
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a)Account receivable period up to July for old collection pattern
b) Total Cash available in month of April is $ 2,32,500.
C) Person should given rise as account receivable period come down to June. Maximum collection will be made in same month.
MONTH
JANUARY
FEBRUARY
MARCH
APRIL
MAY
JUNE
JULY
SALES IN $
5,00,000
4,00,000
1,50,000
50,000
OLD COLLECTION TYPE
35-40-20-5
COLLECTION OF SALE
JAN
1,75,000
2,00,000
1,00,000
25,000
COLLECTION OF SALE
FEB
1,40,000
1,60,000
80,000
20,000
COLLECTION OF SALE
MAR
52,500
60,000
30,000
7,500
COLLECTION OF SALE
APR
17,500
20,000
10,000
2,500
Total
6,75,000
7,40,000
4,62,500
2,32,500
70,000
17,500
2,500
MONTH
JANUARY
FEBRUARY
MARCH
APRIL
MAY
JUNE
JULY
New COLLECTION TYPE
70-20-10
SALES IN $
5,00,000
4,00,000
1,50,000
50,000
COLLECTION OF SALE
JAN
3,50,000
1,00,000
50,000
COLLECTION OF SALE
FEB
2,80,000
80,000
40,000
20,000
COLLECTION OF SALE
MAR
1,05,000
30,000
15,000
COLLECTION OF SALE
APR
35,000
10,000
5,000
Total
8,50,000
7,80,000
3,85,000
1,55,000
45,000
5,000
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