Casa Development, Inc. has budgeted sales revenues as follows:
|Budgeted Sales Revenues|
Past experience indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 50% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. the other 5% is uncollectible.
Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June.
|CASA DEVELOPMENT, INC. Expected Cash Receipts from Sales For the Quarter Ended June 30|
|Total Cash Receipts||$||$||$|
Cash vs Credit Sales
In general, there are two types of sales for a company: cash sales, when the customer pays upon receipt of the product or service, and credit sales, where the customer agrees to pay sometime in the future. The company recognizes revenue immediately in both cases, however, its cash flow depends on when the payment is actually received.
Answer and Explanation:
For the 5 months of sales (Feb-June), note the following:
- Cash sales were only relevant for April, May, and June (20% of total sales in each month).
- The percentages of total credit sales as outlined in the problem (50% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale, the other 5% is uncollectible) only add up to 90%. In order for the problem to make sense, we will assume that 40% of the credit sales are collected in the month following the sale, rather than 30%.
- Therefore, the timing of payments for each month's sales are as follows:
|Timing of Payments|
|Current Month (cash sales)||20%|
|Current Month (credit sales)||40%|
|Month after Sales||32%|
|Two months after Sales||4%|
We can now use these percentages and the budgeted monthly sales to fill out the projected 2Q cash receipts schedule:
|Total Cash Receipts||$79,800||$65,200||$43,400|
Learn more about this topic:
from Accounting 101: Financial AccountingChapter 7 / Lesson 1