Question

Graham Potato Company has projected sales of $12,600 in September, $15,500 in October, $22,600 in November, and $18,600 in December. Of the company's sales, 25 percent are paid for by cash and 75 percent are sold on credit. Experience shows that 40 percent of accounts receivable are paid in the month after the sale, while the remaining 60 percent are paid two months after. Determine collections for November and December Also assume Graham's cash payments for November and December are $19,000 and $11,500, respectively. The beginning cash balance in November is $5,000, which is the desired minimum balance. a. Prepare a cash receipts schedule for November and December Graham Potato Company Cash Receipts Schedule September October November December Sales Credit sales Cash sales One month after sale Two months after sale Total cash receipts

Answer 1

Solution-(a) Sales Credit Sales Graham Potato Company Cash Receipts Schedule September October $12,600 $15,500 $9,450 $11,625 ($12,600*75%) ($15,500*75%) $3,150 $3,875 ($12,600*25%) ($15,500*75%) $3,780 ($9,450*40%) Cash Sales November $22,600 $ 16,950 ($22,600*75%) $5,650 ($22,600*75%) $4,650 ($11,625*40%) $5,670 ($9,450*60%) $15,970 December $18,600 $13,950 ($18,600*75%) $4,650 ($18,600*75%) $6,780 ($16,950*40%) $6,975 ($11,625*60%) $18,405 One month after sale Two months after sale Total Cash receipts Therefore, the collections for November and December are $15,970 and $18,405 respectively

Solution- (b) Total Cash receipts Total Cash payments December $18,405 $11,500 Graham Potato Company Cash Budget Formula November As calculated in (a) $15,970 Given in question $19,000 Total cash receipts - Total $-3,030 cash payments $5,000 (given in question) Beginning cash balance + $1,970 Net cash flow Net Cash Flow (Receipts-Payments) $6,905 Beginning cash balance $5,000 (closing of November) Cummulative Cash balance $11,905 Monthly borrowing (repayment) $3,030 (Based on requirement to maintain minimum $5,000, i.e. $5000-$1970) $-3,030 (Repayment calculated as lower of outstanding loan balance or excess of $11,905 over $5,000) Note: Though the capacity of repayment is $6,905 (i.e. excess of Cummulative cash balance $11,905 over the minimum cash balance $5,000, however the loan amount outstanding is only $3,030 Ending Cash balance Cummulative cash balance + Monthly borrowing (repayment) $5,000 $8,875 Cummulative loan balance $3,030 ($0 opening balance + $3,030 monthly borrowing) $0 (Completely repaid)