Chapter 8, Problem 11CE

Shalimar Company manufactures and sells industrial products. For next year, Shalimar has budgeted the follow sales:

In Shalimar’s experience, 10 percent of sales are paid in cash. Of the sales on account, 65 percent are collected in the quarter of sale, 25 percent are collected in the quarter following the sale, and 7 percent are collected in the second quarter after the sale. The remaining 3 percent are never collected. Total sales for the third quarter of the current year are $4,900,000 and for the fourth quarter of the current year are $6,850,000.

Required:

1. 1. Calculate cash sales and credit sales expected in the last two quarters of the current year, and in each quarter of next year.
2. 2. Construct a cash receipts budget for Shalimar Company for each quarter of the next year, showing the cash sales and the cash collections from credit sales.
3. 3. What if the recession led Shalimar’s top management to assume that in the next year 10 percent of credit sales would never be collected? The expected payment percentages in the quarter of sale and the quarter after sale are assumed to be the same. How would that affect cash received in each quarter? Construct a revised cash budget using the new assumption.