FM27 20 - account. At the end of February, 30% + 50% = 80%...

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Mini Case: 27- 20 d. Assuming that the monthly sales forecasts given previously are accurate, and that customers pay exactly as was predicted, what would the receivables level be at the end of each month? To reduce calculations, assume that 30 percent of the firm's customers pay in the month of sale, 50 percent pay in the month following the sale, and the remaining 20 percent pay in the second month following the sale. Note that this is a different assumption than was made earlier. Use the following format to answer parts c and d: E.O.M. Quarterly DSO = Month Sales A/R Sales ADS (A/R)/(ADS) Jan $100 $ 70 Feb 200 160 Mar 300 250 $600 $6.59 37.9 Apr 300 May 200 Jun 100 Answer: (Note: from this point on, the solutions are expressed in thousands of dollars. Also, the table given below is developed in the solutions to parts D and E.) At the end of January, 30 percent of the $100 in sales will have been collected, so (1 - 0.3)($100) = 0.7($100) = $70 will remain outstanding, that is, in the receivables
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Unformatted text preview: account. At the end of February, 30% + 50% = 80% of January's sales will have been collected, so receivables associated with January sales will be (1 - 0.3 - 0.5)($100) = 0.2($100) = $20. Of February's $200 in sales, 30 percent will have been collected, so 0.7($200) = $140 will remain outstanding. Thus, the receivables balance at the end of February will be $20 from January's sales plus $140 from February's sales, for a total of $160. By the end of march, all of January's sales will have been collected, but 20 percent of February's sales and 70 percent of March's sales will still be outstanding, so receivables will equal 0.2($200) + 0.7($300) = $250. Following this logic, the receivables balance at the end of any month can be estimated as follows: A/R = 0.7(sales in that month) + 0.2(sales in previous month). E.O.M. Quarterly DSO = Month Sales A/R Sales ADS (A/R)/(ADS) Jan $100 $ 70 Feb 200 160 Mar 300 250 $600 $6.59 37.9 Apr $300 $270 May 200 200 Jun 100 110 $600 $6.59 16.7...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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