Question

Problem 1 – Cash Collections Week 3

Providence City acquired its power plant from a private company on June 1. No receivables were acquired with the purchase. Therefore, total accounts receivable on June 1 had a zero balance.

Providence plans to bill customers in the month following the month of sale, and 70% of the resulting billings will be collected during the billing month. 95% of the remaining balance should be collectable in the next following month. The remaining uncollectible amounts will relate to citizens who have moved away. Such amounts are never expected to be collected and will be written off.

Electricity sales during June are estimated at $5,000,000 and expected to increase 30% in July. August sales will be 7% less than July sales.

a) For each dollar of sales, now much is expected to be collected?

b) Estimate the monthly cash collections for June, July, August, and September.

c) As of the end of August, how much will be the estimated amount of receivables for which future cash flows are anticipated?

Answer 1

(a) Expected collection per sales dollar = 1 x 0.70 + (1 - 0.70) x 0.95

= $0.985

(b)

	June	July	Aug	Sept
Sales	5,000,000	6,500,000	6,045,000
Cash collection:
For June billings:
5,000,000 x 70%		3,500,000
5,000,000 x (1 - 0.70) x 95%			1,425,000
For July billings:
6,500,000 x 70%			4,550,000
6,500,000 x (1 - 0.70) x 95%				1,852,500
For Aug Billings:
6,045,000 x 70%				4,231,500
Total cash collections	0	3,500,000	5,975,000	6,084,000

(c)

	July	Aug	Total receivables
Receivables	1,755,000	5,954,325	$7,709,325
Calculations	6,500,000 x (1 - 0.70) x 0.90	6,045,000 x 0.985