Question

Kamal Co. has an average collection period (ACP) of 30 days and an operating cycle of 170 days. It has a policy of keeping at least RO 15,000 on hand as a minimum cash balance, and has a beginning cash balance for the first quarter of RO 20,000.

Beginning receivables for the first quarter amount to RO 30,000 Sales for the first second and the third quarters are expected respectively to be RO 100,000; RO120,000; and RO 150,000. The purchases amount represents 50% of the next quarter's forecasted sales. The quarterly wages and other expenses is RO 7,000. The capital spending occurs in the second quarter and equals to RO 15,000.

The accounts payable period is 45 days. The beginning accounts payable is RO 10,000.

A. What are cash collections in the first and second quarters?

B. What are cash disbursements for the first and second quarters ?

C. What is the cumulative surplus (deficit) at the end of the first and second quarters ?

Answer 1

Solution:-

Accounts Recievable Account
First Quarter
Particulars	Amount(in RO)	Particulars	Amount(in RO)
Opening Balance	30,000.00	Collection from Debtors(bf)	1,24,664.40
Sales	1,00,000.00	Closing Balance	5,335.60
TOTAL	1,30,000.00	TOTAL	1,30,000.00

Working Notes:-

Average Collection Period =30 Days

Operation Cycle of Business=170 Days

Accounts Payable at the Beginning=30,000 (as per question)

All working on the assumption of credit Purchase and Credit sales

a)Computation of Debtors Turnover Ratio(DTR)

DTR=Operation Cycle/Average Collection Period(ACP)

DTR=170/30=5.66

b)Computation of Average Debtors

Average Debtors=Sales/DTR

                           =1,00,000/5.66=17667.8

c)Computation of Closing Debtors

Average Debtors=(Opening Debtors+Closing Debtors)/2

17667.8*2=Opening Debtors+Closing Debtors

35335.7=30000+Closing Debtors

Closing Debtors=35335.7-30000=5335.6

Accounts Recievable Account
Second Quarter
Particulars	Amount(in RO)	Particulars	Amount(in RO)
Opening Balance	5,335.60	Collection from Debtors	88,269.20
Sales	1,20,000.00	Closing Balance	37,066.4
TOTAL	1,25,335.60	TOTAL	1,25,335.60

Working Notes:-

Average Collection Period =30 Days

Operation Cycle of Business=170 Days

Accounts Payable at the Beginning=5335.6 (as per first Quarter)

a)Computation of Debtors Turnover Ratio(DTR)

DTR=Operation Cycle/Average Collection Period(ACP)

DTR=170/30=5.66

b)Computation of Average Debtors

Average Debtors=Sales/DTR

                           =1,20,000/5.66=21201

c)Computation of Closing Debtors

Average Debtors=(Opening Debtors+Closing Debtors)/2

21201*2=Opening Debtors+Closing Debtors

42402=5335.6+Closing Debtors

Closing Debtors=42402-5335.6=37066.4

Accounts Payable Account
First Quarter
Particulars	Amount(in RO)	Particulars	Amount(in RO)
Disburesement	48,254.00	Opening Balance	10,000.00
Closing Balance	21,746.00	Purchase	60,000.00
TOTAL	70,000.00	TOTAL	70,000.00

Working Notes:-

Accounts Payable Period =45 Days

Operation Cycle of Business=170 Days

Accounts Payable at the Beginning=10,000 (as per question)

a)Computation of Creditors Turnover Ratio(DTR)

CTR=Operation Cycle/Accounts Payabel Period(ACP)

CTR=170/45=3.78

b)Computation of Average Creditors

Average Creditors=Purchase/CTR

                           =60,000/3.78=15,873

c)Computation of Closing Creditors

Average Creditors=(Opening Creditors+Closing Creditors)/2

15873*2=Opening Creditors+Closing Creditors

31746=10000+Closing Creditor

Closing Creditors=31746-10000=21746

Accounts Payable Account
Second Quarter
Particulars	Amount(in RO)	Particulars	Amount(in RO)
Disburesement	78,809.40	Opening Balance	21,746.00
Closing Balance	17,936.60	Purchase	75,000.00
TOTAL	96,746.00	TOTAL	96,746.00

Working Notes:-

Accounts Payable Period =45 Days

Operation Cycle of Business=170 Days

Accounts Payable at the Beginning=10,000 (as per question)

a)Computation of Creditors Turnover Ratio(DTR)

CTR=Operation Cycle/Accounts Payabel Period(ACP)

CTR=170/45=3.78

b)Computation of Average Creditors

Average Creditors=Purchase/CTR

                           =75000/3.78=19841.3

c)Computation of Closing Creditors

Average Creditors=(Opening Creditors+Closing Creditors)/2

19841.3*2=Opening Creditors+Closing Creditors

39682.6=21746+Closing Creditor

Closing Creditors=39682.6-21746=17936.6