Asked by McKenzie Copher on Jul 05, 2024
Verified
Ned's Co. has an average collection period of 45 days and an operating cycle of 130 days. It has a policy of keeping at least $10 on hand as a minimum cash balance, and has a beginning cash balance for the first quarter of $20. Beginning receivables for the quarter amount to $35. Sales for the first and second quarters are expected to be $110 and $125, respectively, while purchases amount to 80% of the next quarter's forecast sales. The accounts payable period is 90 days. What is the value of the receivables account at the end of the first quarter?
A) $35
B) $42
C) $55
D) $60
E) $110
Average Collection Period
The mean duration required by a business to receive payments due from its clients.
Accounts Payable Period
The average time it takes for a business to pay off its suppliers after receiving goods or services, reflecting on the company's cash management efficiency.
- Analyze cash flow by calculating cash collections and disbursements based on sales, policies, and operational cycles.
Verified Answer
LS
Logan StolbergJul 11, 2024
Final Answer :
C
Explanation :
Given the average collection period of 45 days, sales made in the first quarter will start to be collected towards the end of the quarter but will mostly be collected in the next quarter. Since the sales for the first quarter are $110, and assuming sales are evenly spread across the quarter, a significant portion of these sales will still be in receivables at the end of the quarter. The average collection period suggests that sales from the last 45 days of the quarter are still in receivables. Therefore, approximately half of the quarter's sales ($110/2 = $55) would still be in receivables at the end of the first quarter, assuming collections are evenly spread out and align with the average collection period. This simplification ignores the beginning receivables and focuses on the impact of the current quarter's sales on the ending receivables balance, leading to the conclusion that the receivables at the end of the first quarter would be approximately $55, which aligns with option C.
Learning Objectives
- Analyze cash flow by calculating cash collections and disbursements based on sales, policies, and operational cycles.
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