Moorcroft Company’s budgeted sales and direct materials purchases are as follows:

Budgeted Sales Budgeted D.M. Purchases
April $327,000 $42,000
May 292,000 51,000
June 407,000 61,000

Moorcroft’s sales are 40% cash and 60% credit. Credit sales are collected 20% in the month of sale, 50% in the month following sale, and 26% in the second month following sale; 4% are uncollectible. Moorcroft’s purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month following the purchase and 60% in the second month following the purchase.
Instructions:
(a) Prepare a schedule of expected collections from customers for June.
(b) Prepare a schedule of expected payments for direct materials for June.
(c) Moorcroft's assistant controller suggested that Moorcroft hire a part-time collector to encourage customers to pay more promptly and to reduce the amount of uncollectible accounts. Sales are still 40% cash and 60% credit but the assistant controller predicted that this would cause credit sales to be collected 30% in the month of the sale, 50% in the month following sale, and 18% in the second month following sale; 2% are uncollectible.
Prepare a schedule of expected collections from customers for June How did these changes impact cash collections? Would it be worth paying the collector $1,000 per month?
(d) The assistant controller also suggested that the company switch their purchases to 40% cash and 60% on account to help stretch out their cash payments. There is no additional interest charge to do this and Moorcroft is still paying their bills on time. There is no change to the company's payment pattern.
Prepare a schedule of expected payments for direct materials for June. How did these changes impact the cash payments for June?

iii) The uncollectible of credit sales was halved, reducing from $9,768 (4% of 60% of $407,000) to $4,884 (2% of 60% of $407,000) for June sales for example.

iv) It is certainly worth paying the collector $1,000 or more per month.

d-i) A Schedule of Expected Payments for Direct Materials for June:

June Purchases - 40% of $61,000 cash = $24,400

May Purchases - 40% of 60% of $51,000 = $12,240

April Purchases - 60% of 60% of $42,000 = $15,120

Total = $51,760

ii) The changes reduced the cash payments for June from $53,300 to $51,760, a difference of $1,540.

Explanation:

a) When sales are made on credit, the finances of the entity will be impacted. While credit sales encourage more sales, there is the risk of uncollectible debts and short-term funding crisis due to non-receipt of payment from customers.

b) To manage this, companies introduce some incentives to encourage early payment, like cash discount. They may also formalize the debt with a note receivable. The note can also be sold for immediate cash.

c) Employing a collector to pursue receivables may be in the best interest of a company. The collector intensifies pressure on the customers to pay.