The sales for the first quarter will be $855,000. Of these, 95% or $812,250 will be collectible. Net sales per day during the first quarter, based on a 360 day year, are $812,250 ÷ 90, or $9,025. Since net (i.e., collectible) accounts receivable represents 50 days of sales, the ending net accounts receivable balance at the end of the first quarter will be $9,025 × 50 days, or $451,250. The formula to use for accounts receivable is: Beginning Accounts Receivable + Sales ? Collections = Ending Accounts Receivable. Whenever we have three of these amounts, we can always find the fourth using a simple linear algebra formula. We have beginning accounts receivable, sales (net collectible sales) and ending accounts receivable. Our formula is to find collections is: $450,000 + $812,250 ? X = $451,250 X = $811,000
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This is the total of the beginning accounts receivable and the ending accounts receivable balance. The problem asks for the collections during the first quarter. The formula to use to calculate collections is Beginning Accounts Receivable + Sales ? Collections = Ending Accounts Receivable, solving for Collections. See the correct answer for a full explanation.
This answer results from using the total sales instead of the collectible sales as the sales amount and to calculate the ending balance in accounts receivable. The net amount (net of the uncollectible amount) should be used instead. See the correct answer for a full explanation.
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Historically, all of the sales are on account and are made evenly over the quarter. 5% of all sales are determined to be uncollectible and written off. The balance of the receivables is collected in 50 days. This sales and collection experience is expected to continue in the first quarter. The projected balance sheet for the first day of the quarter includes the following account balances.
How much cash can Tip-Top anticipate collecting in the first quarter (based on a 360-day year)?