Chapter 22, Problem 7APSA

To determine

22-7A Part 1

Note: All the parts of the question are related with each other. Solution of one part is used as a base for solving / analyzing other Parts of the question.

Introduction:

Account receivable, a term, used to represent amount that to be recovered from our debtors to whom we sold our goods or provide our services on credit basis. It means they provide us consideration not immediate, but after a specified period. So sum total of these types of amounts represented by one term “Account receivable”.

To Determine:

Computation of cash collection from credit sales in the month of june and july

Answer to Problem 7APSA

Solution:

Aztec Company

Account Receivable for the month ended

	June	July
	$	$
April sales	201600
(720000*28%)
May sales
(360000*50%)	180000
(360000*28%)		100800
June sales
(1080000*20%)	216000
(1080000*50%)		540000
July sales
(900000*20%)		180000
	597600	820800

Explanation of Solution

As per terms mentioned in question:

20% of sales recovered in the same month in which sales occurred. So, out of $ 10,80,000 June sales, 20% i.e. $ 1080000 multiplied by 20% which is equal to $ 216000 recovered in the same month June.

Further, 50% of sales recovered in the following month of sales. In continuance of our earlier calculation, $ 1080000 multiplied by 50% which is equal to $ 540000 recovered in following month named July.

As 2% of sales prove uncollectable means no amount can be recovered, technically in accounting language known as Bad debts

Remaining 28% of sales will be recovered in the second month after sales. It means 28% of sales occurred in may month will be recovered in July month.

Conclusion

Account receivable for the month ended June and July will be $ 597,600 and $ 820,800 respectively.

To determine

22-7A Part 2

Introduction:

Ending inventory or say Closing stock is a term used to represent quantities of finished goods (can be of raw material also) that remain in our stock at the end of specified period.

To Determine:

Computation of budgeted inventory says closing stock in the month ending April, May, June and July

Answer to Problem 7APSA

Solution:

Aztec Company

Closing stock for the month ended

	April	May	June	July	August
Sales	4000	2000	6000	5000	3800
20% of Next month sales added by 100 units as safety stock (in Units)	500	1300	1100	860

Explanation of Solution

As per terms mentioned in question:

Monthly inventory will be 20% of next month sales added by 100 units on the name of safety stock. So in the month of April, closing stock will be

20% of next month say May sales quantity added by 100 units as safety stock.

2000 multiplied by 20%, then add 100 units

=400+100

=500 units

The same calculation continues in May, June and July.

Note: Sales units mentioned in column August in solution jus for reference purpose as is used for calculation of ending inventory for the month July.

Conclusion

Ended inventory or say closing stock for the month ended April, May, June and July will be 500 units, 1300 units, 1100 units and 860 units respectively.

To determine

22-7A Part 3

Introduction:

Purchase budget is a format used for computing how much quantities need to be purchase for meeting our sales target along with cost of purchasing such units. It can be purchase of finished product as well as raw material.

To Determine:

Product quantities to be purchased in May, June and July

Answer to Problem 7APSA

Solution:

Aztec Company

Merchandise Purchase Budget for the quarter three

	May	June	July
Opening stock	500	1300	1100
Add: Purchase	2800	5800	4760
Less: Closing stock	1300	1100	860
Sales	2000	6000	5000
Amount of purchase ($)
one unit	110	110	110
Total ($)	308000	638000	523600

Explanation of Solution

Formula: Product units to be purchase

Units to be sold	XX
Add: Closing stock of Product	XX
Less: Opening stock of Product	XX
	XX

It can be interpreted as:

We can say that product units to be purchase is the sum total of product that need sto be sold and closing stock of Product. Out of which, Product quantities already in our stock, which have already purchased say Opening stock will be reduced to arrive net quantity which will be purchase.

In the question as all the figures are already mentioned. So with the help of formula as shown above and also in the part “solution” with “quantities”

Further, Total cost of purchase of Product is computed by:

Cost of one quantity of product multiplied by quantity of product purchased. Say in month May

$110 multiplied by 2800

= $ 308,000/-

Conclusion

Budgeted merchandise quantities will be 2800, 5800 and 4760 units in the month May, June and July amounting $ 308,000, $ 638,000 and $ 523,600 respectively.

To determine

22-7A Part 4

Introduction:

It indicates the amount of cash to be paid for purchases made in the specified period as per terms defined by the company.

To Determine:

Cash to be paid for purchase made in month June and July

Answer to Problem 7APSA

Solution:

Aztec Company

Cash payment in the month ended

	June	July
May purchase	123200
June purchase	382800	255200
July purchase		314160
		(4760*66)
	506000	569360

Explanation of Solution

As per terms mention in question:

Out of purchase cost of $ 110, $ 66 to be paid in the month of purchase and remaining $ 44 to be paid in the next month after purchase.

As computed in Part 3, 2800 units purchased in Month May, in respect of which, $ 44 to be paid in month June amounting $ 123200 computed by multiplying $ 44 with 2800 units.

In the same way, payment is made of purchases made in month June and July.

Conclusion

Budgeted merchandise quantities will be 2800, 5800 and 4760 units in the month May, June and July amounting $ 308,000, $ 638,000 and $ 523,600 respectively.

To determine

22-7A Part 5

Introduction:

Cash budget represents the budgeted cash inflow as well as outflow from whatever source i.e. whether it’s operational or non- operational. Inflow can be from sales or other receipts. Outflow can be in the form of purchase cost or other cost. It is different from cash receipts budget in the form that earlier one contains only receipt. On the other hand, later one contains inflow as well as outflow. It represents the net of inflow and outflow of cash.

To Determine:

Preparation of cash budget for June and July.

Answer to Problem 7APSA

Solution:

Aztec Company

Cash Budget for the month ended

		June	July
Opening balance		100000	100000
Receipt:
cash sales		597600	820800
Loan taken		18650
Payment
Purchase		-506000	-569360
Selling and administrative exp.		-110000	-110000
Interest		-250	-436.5
Loan paid			-43650
Closing Balance		100000	197353.5
Loan Balance	25000
	18650	43650	0

Explanation of Solution

As said earlier it represent the net of cash inflow and outflow or say how much cash remained in our hands at the end of specified period. It can be computed by using formula:

Opening cash balance at the beginning of period:	XXX
Add: receipts during that period	XXX
Less: Expensed during that period	XXX
Closing balance at the end of period	XXX

All receipts and payment are computed as per terms mentioned in question. As question suggest loan can be taken at the end of any month to maintain a minimum balance of $ 100,000. Therefore, $ 18,650 taken as loan in the month of June. Total loans $ 43,650 return back in next month due to excess cash.

As question contains $ 25000 balance as loan payable in May end will be treated opening balance of loan in June month on which at the rate of 1% per month applied as interest computed by multiplying loan figure with interest rate as follows:

$ 25000 multiplied by 1%

= $ 250

Similarly the loan figure rose to $ 43,650 in June beginning on which interest computed as below:

= $ 43,650 multiplied by 1%

= $ 436.5

Conclusion

Budgeted cash remains at the end of June and July will be $ 100,000 and $ 197,353.5 respectively.

To determine

22-7A Part 6

Introduction:

To Determine:

Explanation of Solution

As we know, company will need to borrow $ 18650 in month June.

It was observed that sales are not even throughout the year however selling and administrative are paid equally throughout the year. It should be linked with sales.

Minimum cash balance at month end can be reduced and used for payment purpose.