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- November 30, 2020 at 2:22 am #597054
A company has a two-month recievables cycle.
It recieves in cash 45% of the total gross sales value in the month of invoicing.
Irrecoverable debts are 20% of total gross sales value and there is a 10% discount for settling acccounts within 30 days.What proportion of the first month’s sales will be received as cash in the second month?
My doubt:
Sir why is bad debts not recorded here?Also I noticed that whenver they say the word invoice or within 30 days the sales reciepts are recieved in the next month(Does this always happen??)
November 30, 2020 at 10:12 am #597101If we are preparing a cash budget then we will not receive any cash from irrecoverable debts.
If cash is received within 30 days then it is received in the same month in which the invoice is sent.
November 30, 2020 at 12:50 pm #597143So if I take a scenario where
the invoice is at the end of the month of october
Would this then be recorded as a cash sale in October or November then sir??
November 30, 2020 at 5:12 pm #597184With a cash sale the money is received immediately the sale is made. So if there is a cash sale at any time in October then the cash is received in October.
December 1, 2020 at 3:54 am #597224All sales are on credit.
More favourable credit terms are offered to larger customers (class A) than to smaller customers (class B). All sales are invoiced at the end of the month in which the sale occurs. Class A customers will be given credit terms requiring payment within 60 days of invoicing, while class B customers will be required to pay within 30 days of invoicing.
Since it is recognised, however, that not all customers comply with the credit terms they are allowed, receipts from customers have prudently been estimated as follows:
Customer type
Class A Class B
Within 30 days
60%
31 to 60 days
50% 25%
61 to 90 days
30% 10%
91 to 120 days
15%
Bad debts
5% 5%
The above table shows that customers are expected either to pay within 60 days of the end of the credit period, or not at all. Bad debts will therefore be written off 60 days after the end of the credit period.
Budgeted credit sales for each class of customer in the first 4 months of trading are as follows:
Customer type
Assume all months are of 30 days.
Required
October November December January
$’000 $’000 $’000 $’000
class A100 150 200 300
class B 60 80 40 50
(a) Prepare a statement showing the budgeted cash to be received by HM Co from customers in each of the three months of November 20X2, December 20X2 and January 20X3, based upon the prudently estimated receipts from customers.Sir why is october’s credit sales of class B (within 30 days) recorded in november then sir???
December 1, 2020 at 7:37 am #597234Because people invoiced in October will pay 30 days later so will pay in November.
December 4, 2020 at 12:04 pm #597625Okay sir i understood this concept but I just have a doubt with discounts also
Will discounts be included in the cashflow or would that be ignored just like bad debts?
December 4, 2020 at 2:05 pm #597637The cash received is after subtracting any discount.
December 5, 2020 at 2:41 am #597678Oh thank you sir
I understood the concept that interest and depreciation are not recorded because there aren’t actual cash outflows
But I’m wondering why bad debts are not recorded
I understand the fact that bad debts are not recorded because they also work in the same fashion as interest but when you look at bad debts closely these are actual sales being lostSir is bad debts not recorded because it has something to do with trade recievables(Trade recievables don’t actually have any cashflows)
December 5, 2020 at 8:12 am #597703They are indeed losses and will affect the profit (but because the debtor has not paid, not because we have not made the sale).
However you are forecasting the cash that will be received, and if a debt ends up being irrecoverable then the cash is not being received.
December 25, 2020 at 3:55 pm #600858Sir I still have a question in regard with this question
Just to be clear if the question does not mention the word invoice and says that the company will pay in 30 days would that mean within the month or the next month
Also for questions that specify that the invoice is payed within 30 days
It’s definitely next month ryt sir?December 26, 2020 at 9:23 am #600880It means they pay in the next month 🙂
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