Question

The following is the sales budget for Profit, Inc., for the first quarter of 2018:

January February March
Sales budget $205,000 $ 225,000 $248,000
Credit sales are collected as follows:
75 percent in the month of the sale 20 percent in the month after the sale 5 percent in the second month after the sale. The accounts receivable balance at the end of the previous quarter was $95,000 ($65,000 of which was uncollected December sales).
Required:
(A) Calculate the sales for November. (Round your answer to 2 decimal places, e.g., 32.16.)
(B) Calculate the sales for December. (Round your answer to 2 decimal places, e.g., 32.16.)
(C) Calculate the cash collections from sales for each month from January through March. (Round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

A= $600,000; B=$260,000; C (the cash collections from sales for each month is calculated in the explanation section)

Step-by-step explanation:

A.

The November sales will be the total uncollected sales minus the uncollected sales from December, divided by the collection rate two months after the sale

total uncollected sales = $95,000

uncollected December sales = $65,000

rate two months after the sale = 5% =0.05

November sales = ($95,000 - $65,000)/0.05

= $600,000

B.

The December sales are the uncollected sales from December divided by the collection rate of the previous month's sales

uncollected December sales = $65,000

collection rate of the previous month's sales = 20% in the month after the sale 5% in the second month after the sale = 25% =0.25

The December sales = $65,000/0.25

= $260,000

C.

The collections each month for this company is calculated using the following

Collections = 0.05(Sales from 2 months ago) + 0.2(Last month's sales) + 0.75 (Current sales)

Where

Sales from 2 months ago from January = November sales = $600000

Last month's sales from January = December sales = $ 260,000

Current January sales = $205,000

So

JANUARY COLLECTION = 0.05($600000) + 0.2($260000) + 0.75 ($205,000)

= $30000 + $52,000 + 153,750

= $235,750

FEBRUARY COLLECTION

where

Sales from 2 months ago from February = December sales = $260,000

Last month's sales from February = January sales = $205,000

Current February sales = $225,000

= 0.05($260,000) + 0.2($205,000) + 0.75 ($225,000)

= $13,000 + $41,000 + $168,750

= $222,750

MARCH COLLECTION

where

Sales from 2 months ago from March= January sales = $205,000

Last month's sales from March = February sales = $225,000

Current March sales = $248,000

= 0.05($205,000) + 0.2($225,000) + 0.75 ($248,000)

= $10,250 + $45,000 + $186,000

= $241,250