ACT3391Fall2009handoutCH7&amp;8

# ACT3391Fall2009handoutCH7&amp;8 - *Notes related to...

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EXAMPLE PROBLEM – solving for cash collections Assume that a firm reported the following information: AR, 01-01-08 \$ 4,500,650 AR, 12-31-08 \$ 4,250,375 Write-offs of ARs during 2008 \$ 202,000 Sales during 2008 \$145,000,000 Also, assume that 85% of the firm’s sales are made on a credit basis. How much cash did the firm collect from sales during 2008? SOLUTION : Think of the events/transactions that cause the balance in the AR to change: Credit sales cause the AR balance to increase Subsequent collections of ARs cause the AR balance to increase Write-offs of ARs cause the AR balance to decrease Collections of ARs cause the AR balance to decrease AR balance at beginning of period 4,500,650 Plus credit sales = \$145,000,000 x .85 123,250,000 Plus subsequent collections of ARs previously written-off (none mentioned) 0 Minus write-offs of ARs 202,000 Minus collections of ARs ????
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