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Area I: Business AnalysisBusiness AnalysisBudgeting

CPA · Question 07 · Area I: Business Analysis

Silverton Corp. is preparing its cash budget for April. The following information is available:<br/>- Sales: March (actual) $200,000; April (budgeted) $250,000.<br/>- 40% of sales are for cash; 60% are on credit.<br/>- Credit sales are collected: 50% in the month of sale, 40% in the following month, 10% uncollectible.<br/>- Purchases: March (actual) $120,000; April (budgeted) $150,000.<br/>- Purchases are paid: 70% in month of purchase, 30% in following month.<br/><br/>What are the total estimated cash collections and cash disbursements for April?

Answer options:

A.

Collections: $223,000; Disbursements: $141,000

B.

Collections: $235,000; Disbursements: $141,000

C.

Collections: $223,000; Disbursements: $105,000

D.

Collections: $175,000; Disbursements: $150,000

How to approach this question

Break down Sales into Cash and Credit. Apply collection percentages to Credit Sales for current and prior month. Sum them up. Do the same for Purchases (current and prior month payments).

Full Answer

A.Collections: $223,000; Disbursements: $141,000✓ Correct
Collections:<br/>1. April Cash Sales: $250,000 * 40% = $100,000<br/>2. April Credit Sales collected in April: ($250,000 * 60%) * 50% = $75,000<br/>3. March Credit Sales collected in April: ($200,000 * 60%) * 40% = $48,000<br/>Total Collections = $100k + $75k + $48k = $223,000<br/><br/>Disbursements:<br/>1. April Purchases paid in April: $150,000 * 70% = $105,000<br/>2. March Purchases paid in April: $120,000 * 30% = $36,000<br/>Total Disbursements = $105k + $36k = $141,000

Common mistakes

Applying collection % to total sales instead of credit sales; ignoring the uncollectible portion; forgetting prior month flows.
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