Concept explainers
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
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.
Account receivable for the month ended June and July will be $ 597,600 and $ 820,800 respectively.
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.
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.
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/-
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.
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.
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.
22-7A Part 5
Introduction:
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
Budgeted cash remains at the end of June and July will be $ 100,000 and $ 197,353.5 respectively.
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.
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Chapter 22 Solutions
Fundamental Accounting Principles -Hardcover
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