SOLUTIONS TO SELECTED END-OF-CHAPTER 10 PROBLEM SOLVING QUESTIONS

5. a. A 45-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:

(90 – 45)/90 = 1/2 of current sales are collected. So:

Q1 Q2 Q3 Q4

Beginning receivables $335.00 $370.00 $420.00 $455.00

Sales 740.00 840.00 910.00 970.00

Cash collections –705.00 –790.00 –875.00 –940.00

Ending receivables $370.00 $420.00 $455.00 $485.00

b. A 60-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:

(90 – 60)/90 = 1/3 of current sales are collected. So:

Q1 Q2 Q3 Q4

Beginning receivables $335.00 $493.33 $560.00 $606.67

Sales 740.00 840.00 910.00 970.00

Cash collections –581.67 –773.33 –863.33 –930.00

Ending receivables $493.33 $560.00 $606.67 $646.67

c. A 30-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:

(90 – 30)/90 = 2/3 of current sales are collected. So:

Q1 Q2 Q3 Q4

Beginning receivables $335.00 $246.67 $280.00 $303.33

Sales 740.00 840.00 910.00 970.00

Cash collections –828.33 –806.67 –886.67 –950.00

 Ending receivables $246.67 $280.00 $303.33 $323.33

6. The operating cycle is the inventory period plus the receivables period. The inventory turnover and
inventory period are:

Inventory turnover = COGS / Average inventory

Inventory turnover = $165,763 / [($17,385 + 19,108) / 2]

Inventory turnover = 9.0846 times

Inventory period = 365 days / Inventory turnover

Inventory period = 365 days / 9.0846

Inventory period = 40.18 days

And the receivables turnover and receivables period are:

Receivables turnover = Credit sales / Average receivables

Receivables turnover = $216,384 / [($13,182 + 13,973) / 2]

Receivables turnover = 15.9370 times

Receivables period = 365 days / Receivables turnover

Receivables period = 365 days / 15.9370

Receivables period = 22.90 days

So, the operating cycle is:

Operating cycle = 40.18 days + 22.90 days

Operating cycle = 63.08 days

The cash cycle is the operating cycle minus the payables period. The payables turnover and payables
period are:

Payables turnover = COGS / Average payables

Payables turnover = $165,763 / [($15,385 + 16,676) / 2]

Payables turnover = 10.3405 times

Payables period = 365 days / Payables turnover

Payables period = 365 days / 10.3405

Payables period = 35.30 days

So, the cash cycle is:

 Cash cycle = 63.08 days – 35.30 days

Cash cycle = 27.78 days The firm is receiving cash on average 27.78 days after it pays its bills.

7. a. The payables period is zero since the company pays immediately. Sales in the year following this
one are projected to be 15 percent greater in each quarter. Therefore, Q1 sales for the next year
will be $660(1.15) = $759. The payment in each period is 30 percent of next period’s sales, so:

Q1 Q2 Q3 Q4

Payment of accounts $172.50 $214.50 $243.00 $227.70

b. Since the payables period is 90 days, the payment in each period is 30 percent of the current
period sales, so:

Q1 Q2 Q3 Q4

Payment of accounts $198.00 $172.50 $214.50 $243.00

c. Since the payables period is 60 days, the payment in each period is 2/3 of last quarter’s orders,
plus 1/3 of this quarter’s orders, or:

Quarterly payments = 2/3(.30) times current sales + 1/3(.30) next period sales

Q1 Q2 Q3 Q4

Payment of accounts $189.50 $186.50 $224.00 $237.90

8. Since the payables period is 60 days, the payables in each period will be:

Payables each period = 2/3 of last quarter’s orders + 1/3 of this quarter’s orders

Payables each period = 2/3(.75) times current sales + 1/3(.75) next period sales

Q1 Q2 Q3 Q4

Payment of accounts $1,137.50 $1,220.00 $1,080.00 $1,051.25

Wages, taxes, other expenses 287.00 336.00 304.00 256.00

Long-term financing expenses 73.00 73.00 73.00 73.00

Total $1,497.50 $1,629.00 $1,457.00 $1,380.25

9. a. The November sales must have been the total uncollected sales minus the uncollected sales from
December, divided by the collection rate two months after the sale, so:
November sales = ($122,800 – 87,750) / .15
November sales = $233,666.67

b. The December sales are the uncollected sales from December divided by the collection rate of
the previous months’ sales, so:

December sales = $87,750 / (.20 + .15)

December sales = $250,714.29

c. The collections each month for this company are:

Collections = .15(Sales from 2 months ago) + .20(Last month’s sales) + .65(Current sales)

January collections = .15($233,666.67) + .20($250,714.29) + .65($258,000)

January collections = $252,892.86

February collections = .15($250,714.29) + .20($258,000) + .65($274,200)

February collections = $267,437.14

March collections = .15($258,000) + .20($274,200) + .65($298,000)

March collections = $287,240

10. The sales collections each month will be:

Sales collections = .35(current month sales) + .60(previous month sales)

Given this collection, the cash budget will be:

April May June

Beginning cash balance $443,500 $394,227 $503,450

Cash receipts

Cash collections from credit sales 410,249 580,695 619,207

Total cash available 853,749 974,922 1,122,657

Cash disbursements

Purchases 247,100 232,850 277,900

Wages, taxes, and expenses 62,964 76,364 79,670

Interest 18,058 18,058 18,058

Equipment purchases 131,400 144,200 0

Total cash disbursements 459,522 471,472 375,628

 Ending cash balance $394,227 $503,450 $747,029

12. First, we need to calculate the sales from the last quarter of the previous year. Since 50 percent of the
sales were collected in that quarter, the sales figure must have been:

Sales last quarter of previous year = $85,000,000 / (1 – .50)

Sales last quarter of previous year = $174,000,000

Now we can estimate the sales growth each quarter, and calculate the net sales including the seasonal
adjustments. The sales figures for each quarter will be:

Quarter 1 Quarter 2 Quarter 4 Quarter 4

Sales (basic trend) $185,000,000 $203,500,000 $223,850,000 $246,235,000

Seasonal adjustment 0 –16,000,000 –8,000,000 21,000,000

Sales projection 185,000,000 187,500,000 215,850,000 267,235,000

Since 50 percent of sales are collected in the quarter the sales are made, and 45 percent of sales are
collected in the quarter after the sales are made, the cash budget is:

Quarter 1 Quarter 2 Quarter 4 Quarter 4

Collected within

quarter $92,500,000 $93,750,000 $107,925,000 $133,617,500

Collection from

previous quarter 78,300,000 83,250,000 84,375,000 97,132,500

Cash collections from

sales $170,800,000 $177,000,000 $192,300,000 $230,750,000