Timpco
A Retailer Makes Both Cash And Credit Sales Ie Sales On O
Timpco, a retailer, makes both cash and credit sales. The company's budgeted sales figures for the last quarter of the year are provided for October, November, and December, including details on cash and credit sales amounts. Past experience indicates that 5% of credit sales are uncollectible. Of the collectible credit sales, 60% are collected in the same month of sale, while 40% are collected in the following month. Customers have the opportunity to receive a 1.5% discount if they pay within 10 days of billing, with approximately 75% of credit sales utilizing this discount. Inventory purchases each month are equal to 100% of the cost of the following month's projected sales, with a gross profit rate of approximately 30%. All purchases are made on credit, with 25% paid in the month of purchase and the remaining 75% paid in the following month. No early payment discounts are offered.
Based on this information, the task involves:
Calculating the budgeted total cash receipts for November and December.
Calculating the budgeted total cash payments for November and December, considering the projected sales for January at $200,000.
Paper For Above instruction
The calculation of budgeted total cash receipts and payments requires a detailed analysis of sales, collection patterns, discounts, and payment schedules. This comprehensive approach ensures accurate forecasting and financial planning critical for Timpco’s operational management.
Calculation of Cash Receipts for November and December
Cash receipts are primarily derived from collections of credit sales made in previous months and current month sales, adjusted for uncollectible amounts, payment timing, and discounts. The process starts with identifying credit sales percentages, collection rates, and discount utilization to estimate the actual cash inflow.
Step 1: Determine credit sales for October, November, and December
Month
Credit Sales
Uncollectible (5%)
October
$100,000
$5,000
$95,000
November
$150,000
$7,500
$142,500
December
$90,000
$4,500
$85,500
The collectible credit sales for each month are crucial for calculating the cash inflows.
Step 2: Calculate collections within the month and in the following month
Per the collection pattern:
60% of the collectible credit sales are collected in the same month.
40% are collected in the following month.
Additionally, 75% of the collectible credit sales take advantage of the 1.5% discount if paid early, influencing the cash received.
Step 3: Calculate collections for November
Component
Calculation
Collection of November credit sales (current month)
60% of $142,500
$85,500
Collection of October credit sales (from previous month)
40% of $95,000
$38,000
Adjustment for discounts
75% of collections paid early at 1.5% discount
Calculate as follows:
- Early payment portion: 75% of total collections
- Discount amount: 1.5% of early payment amount
Total collections (before discounts)
$85,500 + $38,000 = $123,500
The actual cash received considers the discount component:
Early payments receiving discounts:
75% of $123,500 = $92,625 are paid early.
Discount on early payment: 1.5% of $92,625 ≈ $1,389.
Thus, cash inflow from discounts reduces total cash received by approximately $1,389, resulting in a net collected amount.
Net Cash Receipts for November Calculation
Amount
Cash from current month collections
60% of $142,500
$85,500
Cash from previous month collections (October)
40% of $95,000
$38,000
Less discount adjustments
75% of collections paid early at 1.5% -$1,389
Total $122,111
Similar calculations apply for December, considering the collections of December credit sales and the remaining collections of November credit sales.
Calculating December Cash Inflows
Component
Calculation
Amount
Collection of December credit sales (current month)
60% of $85,500
$51,300
Collection of November credit sales (from previous month)
40% of $142,500
$57,000
Adjustment for discounts (similar to November)
75% of total collections; discount at 1.5%
Total collections (before discounts)
$51,300 + $57,000 = $108,300
Applying the same discount treatment:
Early payers: 75% of $108,300 = $81,225
Discount amount: 1.5% of $81,225 ≈ $1,218
Net cash received for December:
Net Cash Receipts for December
Calculation
Amount
Cash from current month collections
60% of $85,500
$51,300
Cash from previous month collections
40% of $142,500
$57,000
Less discount adjustments
75% of collections paid early at 1.5% -$1,218
Total
Summary of Budgeted Cash Receipts
The total budgeted cash receipts for November and December, after adjusting for discounts and collection patterns, are approximately $122,111 and $107,082, respectively. These figures form the foundation for cash flow planning and operational budgeting.
Calculation of Budgeted Cash Payments for November and December
Cash payments for merchandise are based on the inventory purchase policy, which stipulates that purchases match 100% of the next month’s projected sales at cost. With a gross profit rate of approximately 30%, the cost of sales can be derived to estimate purchase amounts.
Step 1: Determine projected sales and costs
Projected sales:
- January: $200,000
- December (given): $170,000
- November: $270,000
- October: $200,000 (from provided data)
Calculating cost of sales:
- Cost of sales = Sales × (1 - gross profit margin)
- For simplicity, with a gross profit rate of 30%, cost of sales = Sales × 70%
Step 2: Determine purchase amounts for November and December
Month
Projected Sales Next Month
Cost of Sales (70%)
Purchases (Matching next month’s cost of sales)
November
December: $170,000
$119,000
December
January: $200,000
$140,000
Thus, for November, purchases are $119,000, and for December, purchases are $140,000.
Step 3: Calculate payment schedules
Since 25% of purchases are paid in the month of purchase:
- November payments: 25% of $119,000 = $29,750
- December payments: 25% of $140,000 = $35,000
The remaining 75% of purchases are paid in the following month:
- November: 75% of $119,000 = $89,250 (paid in December)
- December: 75% of $140,000 = $105,000 (paid in January)
Step 4: Summarize cash payments for November and December
November
December
Payments in November
25% of November purchases = $29,750
Payments in December
Remaining 75% of November purchases + 25% of December purchases = $89,250 + $35,000 = $124,250
Payments in January
Remaining 75% of December purchases = $105,000
Final Summary
The budgeted cash payments are approximately $29,750 for November, $124,250 for December, and an upcoming obligation of $105,000 in January. Proper management of these payments is essential for maintaining liquidity and ensuring inventory replenishment aligns with sales forecasts.
Conclusion
This detailed analysis demonstrates the interconnectedness of sales, collections, discounts, and payments in Timpco's financial planning. Accurate forecasting enables effective management of cash flows, supporting sustainable growth and operational stability. By understanding collection patterns and payment schedules, Timpco can optimize cash liquidity, negotiate favorable credit terms, and plan future inventories accordingly.
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