Question

Timpco, a retailer, makes both cash and credit sales (i.e., sales on open account). Information regarding budgeted sales for the last quarter of the year is as follows: October November December Cash Sales $100,000 $120,000 $80,000 Credit Sales $100,000 $150,000 $90,000 Total $200,000 $270,000 $170,000 Past experience shows that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% are collected in the month of sale; the remaining 40% are collected in the month following the month of sale. Customers are granted a 1.5% discount for payment within 10 days of billing. Approximately 75% of collectible credit sales take advantage of the cash discount. Inventory purchases each month are 100% of the cost of the following month’s projected sales. (The gross profit rate for Timpco is approximately 30%.) All merchandise purchases are made on credit, with 25% paid in the month of purchase and the remainder paid in the following month. No cash discounts for early payment are in effect. Required - Please explain the math used. 1. Calculate the budgeted total cash receipts for November and December.

Answer 1

To calculate the budgeted total cash receipts for November and December, we need to consider the collection pattern of credit sales and the cash discount.

Step-by-step explanation:

To calculate the budgeted total cash receipts for November and December, we need to consider the collection pattern of credit sales and the cash discount. From the given information, we know that 60% of collectible credit sales are collected in the month of sale, and the remaining 40% are collected in the month following the month of sale. Additionally, approximately 75% of collectible credit sales take advantage of the 1.5% cash discount.

Using this information, we can calculate the cash receipts for each month as follows:

November: (60% of November credit sales) + (40% of October credit sales) - (75% of November credit sales with cash discount)

December: (60% of December credit sales) + (40% of November credit sales) - (75% of December credit sales with cash discount)

By substituting the given values into the formulas above, we can find the budgeted total cash receipts for November and December.

Answer 2

To calculate the budgeted total cash receipts for November and December, we add the cash sales for each month to the portion of credit sales from the previous month that are collected, after adjusting for uncollectible accounts and discounts for early payment.

Step-by-step explanation:

To calculate the budgeted total cash receipts for November and December, we'll consider both cash sales and the collection of credit sales, including those collected within the discount period and those collected without the discount.

November Cash Receipts Calculation

Cash Sales: Directly add October's cash sales since they are fully realized in November.
$120,000 (November cash sales)

Credit Sales from October collected in November: Use 95% of October's credit sales (because 5% is uncollectible), and use 40% of that amount since 60% of collectibles are collected in the month of sale.
$100,000 * 95% * 40% = $38,000

Total Cash Receipts for November: Sum of November cash sales and credit sales from October collected in November.
$120,000 + $38,000 = $158,000

December Cash Receipts Calculation

Cash Sales: Directly add December's cash sales.
$80,000 (December cash sales)

Credit Sales from November collected in December: Use 95% of November's credit sales, and use 40% of that amount as collections for the following month.
$150,000 * 95% * 40% = $57,000

Discounted Credit Sales: For the November credit sales collected within the discount period in December, we calculate 75% of the 60% collected in December that are eligible for a 1.5% discount. However, we only subtract the discount, not the full amount of these collections because they are still part of total cash receipts.
$150,000 * 95% * 60% * 75% * 1.5% = $1,216.88

Total Discount to Deduct from Cash Receipts: The discount amount subtracted from the collectible credit sales collected within the discount period.
$1,216.88

Total Cash Receipts for December: Sum of December cash sales, credit sales from November collected in December, minus the total discount for early payment.
$80,000 + $57,000 - $1,216.88 = $135,783.13