I have a homework problem that asks me to do the following:
1. Prepare a schedule of total cash collections for October through December.
2. Prepare a schedule of total cash disbursements for October through December.
3. Prepare a cash budget for October through December.
I know basically how to do that, but the teacher added the following bit that I am not sure what to do with: *Uncollectibles amounting to 5% of sales are anticipated, and management believes that only 15% of the accounts outstanding on September 30, 2014, will be recovered and that the recovery will be in October 2014.* Where (one or all of #1, #2, #3) and how to I account for this? All the other problems we have done told us to ignore uncollectables but this seems to imply something else. And there are no examples in our book like this one. Help! Thank you :)
To account for the uncollectibles and the recovery of accounts, you will need to adjust the cash collections schedule and the accounts receivable balance.
1. Schedule of Total Cash Collections:
First, calculate the total sales for each month by multiplying the projected sales by the respective percentage of recovery. For example, if the projected sales for October are $10,000 and 15% of the outstanding accounts from September will be recovered in October, then the total sales for October would be $10,000 * 0.15 = $1,500.
Next, subtract the uncollectibles amount from the total sales for each month. Using the same example, if uncollectibles amount to 5% of sales, then the adjusted sales for October would be $1,500 - ($1,500 * 0.05) = $1,425.
Repeat this calculation for each month to determine the adjusted sales figures.
2. Schedule of Total Cash Disbursements:
The uncollectibles do not directly affect the cash disbursements schedule. You can prepare the cash disbursements schedule as you normally would, taking into account all the expected cash outflows during the months of October through December.
3. Cash Budget:
To prepare the cash budget, you will include the adjusted sales figures from the schedule of total cash collections. This will help you estimate the expected cash inflows for each month.
Additionally, you need to consider any other expected cash inflows (such as loans received or investment income) and subtract any cash outflows (such as operating expenses, loan repayments, or purchases of capital assets).
By incorporating the adjusted sales figures and considering all other cash inflows and outflows, you can determine the cash balance for each month during October through December.
Remember to consider any beginning cash balance from the previous period when calculating the ending cash balance for each month.
Overall, the adjustments for uncollectibles impact the cash collections schedule and might indirectly affect the cash budget. It's important to carefully consider the percentages given and accurately adjust the sales figures to account for the likelihood of uncollectible accounts and the recovery of outstanding accounts.
To account for the uncollectibles, you will need to adjust the cash collections, accounts receivable, and cash budget calculations. Here's how you can incorporate this information into each of the three tasks:
1. Schedule of cash collections:
- Start with the sales figures for October through December.
- Multiply each month's sales by 95% (to factor in the 5% uncollectibles).
- For September accounts outstanding, multiply the amount by 15% (to account for the recovery in October).
- Add up all these adjusted amounts to determine the total cash collections for each month.
2. Schedule of cash disbursements:
- This step remains unaffected by the uncollectibles information. You can prepare the schedule of cash disbursements as you normally would, considering all the expenses you need to pay during October through December.
3. Cash budget:
- Begin the cash budget by considering the opening cash balance for October.
- Include cash collections from step 1 and subtract cash disbursements from step 2.
- Adjust the accounts receivable balance for October through December to account for the uncollectibles and the recovery.
- Finally, add any financing activities (loans, interest, etc.) and calculate the ending cash balance for each month.
By incorporating the uncollectibles information into these calculations, you will have a more accurate representation of the cash inflows and outflows for the given period.