The Sport Company is preparing a cash budget for the month of July.The following information on accounts receivable collections is available from Sport's past collection experience: The remaining 4% are not collected and are written off as bad debts.
Credit sales to date are as follows:
What are the estimated collections in July?

Question

Quizplus · Accepted Answer

First, we need to calculate the total credit sales that Sport Company has made to date. 
$100,000 + $50,000 + $25,000 = $175,000

Then, we need to calculate the percentage collected on credit sales based on the past collection experience, which is 95%. 
Total credit sales x Percentage collected = Estimated collections 
$175,000 x 0.95 = $166,250

However, 4% of the total credit sales are not collected and are written off as bad debts. 
$175,000 x 0.04 = $7,000

Estimated collections - Bad debts = Net estimated collections 
$166,250 - $7,000 = $159,250

Therefore, the estimated collections in July would be $131,250, which is the net estimated collections plus the beginning accounts receivable balance of $28,000.

The Sport Company Is Preparing a Cash Budget for the Month