Sequoia Furniture Company’s sales over the past three months, half of which are for cash, were as follows:
a. Assume that Sequoia’s collection period is 60 days. What would be its cash receipts in May? What would be its accounts receivable balance at the end of May?
b. Now assume that Sequoia’s collection period is 45 days. What would be its cash receipts in May? What would be its accounts receivable balance at the end of May?
If the collection period is 60 days, May cash receipts from March sales will equal half of March sales or $211,000. In addition the company will receive cash from half of May sales, or $271,000. The total is $482,000. The May accounts receivable balance should be the last 60 days’ worth of credit sales. May credit sales were $271,000 and April’s were $336,000, thus the accounts receivable balance would be $607,000.
With a 45-day collection period, cash collected on May 1 is from credit sales made in mid-March, and collections on May 31 are from credit sales made in mid-April. Therefore, cash receipts from credit sales are from the period mid-March through mid-April, or (422,000/2 + 672,000/2)/2 = $273,500. Adding sales for cash of $271,000, the total is $544,500. The accounts receivable balance would be May’s credit sales and half of April’s credit sales, or 271,000 + 336,000/2 = $439,000.