Information Using the following information based on expected sales to forecast
ID: 2800590 • Letter: I
Question
Information Using the following information based on expected sales to forecast the monthly cash collections, accounts receivable balance, monthly cash disbursements, net cash flows, and cash surplus / deficit at the end of each month in the fourth quarter of 2017 (October - December 2017). Do not allow your firm to have a cash balance below the minimum cash balance and only borrow what you need. ALL SALES ARE MADE ON CREDIT a. In September 2017, sales were $50,000. b. The firm's total sales in 2016 were $2,028,000. The firm's accounts receivable balance on December 31, 2015 was $35,000. The firm's accounts receivable balance on December 31, 2016 was $65,000. C. Accounts payable are 60% of sales d. Operating expenses are 10% of sales e. The firm plans to purchase equipment in October costing $125,000 f. Beginning Cash Balance in October $25,000 g. Minimum Cash Balance $5,000 h. Assume there is an annual interest rate of 18% on short term debt and that the firm starts with no short term borrowing. i. Sales are expected to be $40,000 for October 2017, $400,000 for November 2017, and $100,000 for December 2017.Explanation / Answer
Accounts receivable turnover = Net annual credit sales/average accounts receivables
= 2,028,000/(35000+65000)/2
= 2,028,000/50,000
= 40.56.
Thus accounts receivable period = 365/40.56 = 9.00 days
Closing average receivable balance for november = opening average receivable balance for December = accounts receivable period*November sales/30 = 9*400,000/30
= 120,000. This is the opening accounts receivable balance for December 2017.
This amount will be collected in December.
Sales of December = 100,000. Thus AR at end of December = 9*100,000/30 = 30,000. Thus cash collected in the month of December for december sales december sales - closing AR balance = 100,000 - 30,000 = 70,000
Total cash collections for december = cash collected towards november sale+cash collected towards december sale
= 120,000+70,000
= $190,000