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Since accounts receivable and accounts payable are settled within 2 months each, there is no need to worry about breaking down the receivables and payables from January and February into the actual months the cash is received and paid. This question asks for the amount of change in cash from the beginning of the quarter to the end of the quarter. We can start with the beginning cash balance and use the activity to calculate the ending cash balance and then take the difference, or we can ignore beginning and ending cash balances and just sum the activity, since the question asks only for the amount of change. We will use the use the second method. Receipts: Accounts receivable at the beginning of the quarter will all be received during the quarter, since 40% are collected in the month of sale and 60% are collected in the following month: +$300,000 Sales made during January and February will all be collected during the quarter, for the same reason: +$1,500,000 40% of sales made during March will be collected during the quarter: +$200,000 Disbursements: Accounts payable for inventory at the beginning of the quarter will all be paid during the quarter, since 50% of inventory purchases are paid in the month of purchase and the other 50% in the following month: ?$500,000 Inventory purchased during January and February will all be paid for during the quarter, for the same reason: ?$775,000 50% of inventory purchased during March will be paid for during the quarter: ?$112,500 All of the other expenses for January, February and March will be paid for during the quarter, since other expenses are paid in the month incurred: ?$500,000 Net change in cash: + $300,000 + $1,500,000 + $200,000 ? $500,000 ? $775,000 ? $112,500 ? $500,000 = +$112,500
This answer results from assuming that all the sales made during March are collected during the quarter, and all the purchases made during March are paid for during the quarter. The company expects to collect 40% of its monthly sales in the month of the sale and 60% in the following month; and it pays for 50% of inventory purchases in the month of purchase while the other 50% are paid in the following month. Therefore, only 40% of March sales will be collected during the quarter and only 50% of March purchases will be paid for during the quarter.
This answer results from assuming that all the sales made during March are collected during the quarter. The company expects to collect 40% of its monthly sales in the month of the sale and 60% in the following month. Therefore, only 40% of March sales will be collected during the quarter.
This answer results from assuming that all the purchases made during March are paid for during the quarter. The problem says that 50% of inventory purchases are paid in the month of purchase, and the other 50% are paid in the following month. Therefore, only 50% of March purchases will be paid for during the quarter.