- November 30, 2020 at 5:01 pm #596955applessauceMember
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30.3 HM Co commenced business on 1 October 20X2, to provide specialist contract cleaning services to industrial customers. All 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 Within 30 days 31 to 60 days 61 to 90 days 91 to 120 day Bad debts
Class A 50% 30% 15% 5%
Class B 60% 25% 10% 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:
Class A Class B
Assume all months are of 30 days.
October November December January
$’000 $’000 $’000 $’000
100 150 200 300
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.
Note. The following mark allocation is provided as guidance for this requirement:
? 1 mark each for cash received from Class A customers in Nov, Dec and Jan
? 1 mark each for cash received from Class B customers in Nov, Dec and Jan
Sir I don’t understand what to do with the bad debts
I don’t quite understand why it says within 60 days or not at all
If we take for example the cashflows of october
Class B: The 60% is not recorded as the cash sales on october but for november
Have they done this because it says it is invoiced at the end of the month??
And if you check within 30 days from the start of october it is actually the end of october which is 31st october(that is the start of nov)
Sir would the 60% for octobers credit sales still be appliable to nov even if they did not specify that invoices will be paid in 30 days??November 24, 2022 at 11:12 pm #672445Charisma12Member
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Can you explain how to do this question pleaseNovember 24, 2022 at 11:25 pm #672446Charisma12Member
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i dont understandNovember 25, 2022 at 9:52 am #672473John MoffatKeymaster
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The credit period is 30 days and therefore customers are supposed to pay at the end of 30 days.
The table makes is clear that some customers take up to 90 days to pay (which is 60 days more than the credit period).
For Class A customers, 100,000 is invoices in October, and therefore the cash will be received as follows:
In November 50% x 100,000 = 50,000
In December 30% x 100,000 = 30,000
In January 15% x 100,000 = 15,000
(The remaining 5% (5,000) are bad debts and so cash is not received and is therefore irrelevant when preparing a cash budget)
Have you watched my free lectures on the preparation of cash budgets? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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