Hesterman Corporation makes one product and has provided the following information to help prepare the master budget for the next four months of operations: Credit sales are collected:40% in the month of the sale60% in the following monthThe ending finished goods inventory should equal 40% of the following month's sales. The ending raw materials inventory should equal 20% of the following month's raw materials production needs.The expected cash collections for May is closest to:

Question

Hesterman Corporation makes one product and has provided the following information to help prepare the master budget for the next four months of operations:  Credit sales are collected:40% in the month of the sale60% in the following monthThe ending finished goods inventory should equal 40% of the following month's sales. The ending raw materials inventory should equal 20% of the following month's raw materials production needs.The expected cash collections for May is closest to:

Quizplus · Accepted Answer

To calculate expected cash collections for May, we need to first calculate the total sales for May and June, as these are the two months that will affect May's cash collections.
Total sales for May:
Credit sales: $550,000
Cash sales: $220,000 (assuming cash sales are 40% of total sales, since we don't have any other information)
Total sales: $770,000
60% of credit sales for April: $330,000 x 0.6 = $198,000 (this is the amount of credit sales from April that we expect to collect in May)
Expected total cash collections for May: $220,000 (May cash sales) + $198,000 (May collection of April credit sales) = $418,000
Total sales for June:
Credit sales: $605,000
Total sales: $805,000 (assuming cash sales are 40% of total sales)
40% of June sales: $322,000 (this is the amount of credit sales from June that we expect to collect in July)
Ending finished goods inventory for May: 40% of June's sales = $242,000
Ending raw materials inventory for May: 20% of June's raw materials production needs = $77,000
Total expected cash collections for July: $322,000 (June credit collections) + $242,000 (ending finished goods inventory for May) = $564,000
Therefore, the closest option is B) $995,920.

Hesterman Corporation Makes One Product and Has Provided the Following