1)You\'re going into business and need to set credit terms for your customers. E
ID: 2805422 • Letter: 1
Question
1)You're going into business and need to set credit terms for your customers. Evaluate the following options and tell us which you feel would be best for your company and why? 4/10, 3/20, 2/30 or net 60. Why didn't you choose the other options? (Be sure to support your answer with concepts from this week's reading material
2)We learned about preparing budgets in chapter 15. What factors would go into your thought process for budgeting for the following expense line item - Employee Health Insurance? In other words, what would you look at in order to properly budget this expense line item? You should provide at least 3 factors.
3)We learned about cash budgets in chapter 15. Why do you suppose companies that prepare cash budgets take into consideration a minimum cash balance? Provide an example to support your explanation as to why companies maintain a minimum cash balance.
4)Let's take a look at budgeting for cash collections. Accrual based sales are $400,000 for December, $150,000 for January, $200,000 for February and $350,000 for March. Cash collections are as follows: 60% in the month of sale, 20% the following month and 15% two months after the month of sale. 5% are considered uncollectible. Based on the above information, what would be the total cash collections for the month of March? (Be sure to show your work)
Explanation / Answer
1) We will calculate the cost of credit for each option.
4/10, net 60 days = (4% / 96%)*(360/(60-10)
= 30%
3/20, net 60 days = (3% / 97%)*(360/(60-20)
= 27.83%
2/30, net 60 days = (2% / 98%)*(360/(60-30)
= 24.48%
We will set credit terms at 2/30 as this is the lowest credit cost. The other credit terms are more expensive.
2) In order to budget the Employee Health insurance, we would first see the amount of charges paid for the insurance to be recorded, the month in which the amount is expected to be paid and if the payment is one time or monthly.
3) When preparing a cash budget, companies normally take a minimum cash balance to be maintained so that the company can carry out its activities in a smooth way. In case of shortage of cash, funds need to be borrowed.
Like a company has a negative cash balance in a particular month, so in the next month it will not be able to pay for its expenses like purchases and other expenses. so a shortfall in cash will disrupt the business activties.
4)
March collection Formula Amount March sale 350000*60% $2,10,000 Feb sale 200000*20% $40,000 Jan sale 150000*15% $22,500 Total $2,72,500Related Questions
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