Cash Management - Forecast sales treatment of bad debts

steveadams48

I am self studying level 3 using BPP text books and would appreciate any guidance on the following:

In the BPP text it is advised that bad debts are debited from the final month sales percentage e.g:

Month sales are £100,000 and 25% is in 30 days, 50% 60 days, 25% 90 days, 5% of all invoices are expected to be bad debts.

In the text we treat the bad debt only in month 3 (90 days) by deducting (bad debts) 5% from 25%, then calculate 20% of £100k = £20k e.g:

Month 1
£100,000 x 25% = £25,000
Month 2
£100,000 x 50% = £50,000
Month 3
£100,000 x (25%-5%)= £20,000
Total = £95,000

This makes sense to me and I thought I understood the concept.

I then tried AAT Practice CBT 2, Q2.1 which has a 5% bad debt to be calculated.
I have worked out that the AAT answer uses the following equation for all three periods:

Amount x month percentage x 95%.

Using my previous example it would be:

Month 1
£100,000 x 25% x 95% = £23,750
Month 2
£100,000 x 50% x 95% = £47,500
Month 3
£100,000 x 25% x 95% = £23,750
Total = £95,000

THe total is the same but it is spread over all three periods using the AAT answer.

The only difference is that Q2.1 has the following wording following the amounts and monthly percentages:
The revised receipt pattern is to be applied after assuming that 5% of all sales will be bad debts.

My exam is this Thursday and without being able to seek tutor support for this module I am stuck. Help would be very much appreciated.

Thanks.
:huh:

janwal

Hi Steve

I passed Cash Management in June and we were taught the 2nd way to do it. In fact we were told to make it easier remove the 5% at the beginning and then work out: ie

100000 - 5% = 95000

then 95000 x 25% = £23750 and so on.

I found that so much easier to remember, then didn't get a question in the exam. typical.

Good luck with the exam, is this the last one or have you got more to do.

Jan

steveadams48

Hi Jan

Thank you, thats really helpful.

After a long working career with Midland/HSBC bank who I joined straight from school, I was made redundant earlier this summer. In the end this has been a good thing, its allowed me to go in a different direction and am fortunate enough to be able to study AAT full time and see more of the family.

I passed 4 of the level 2 exams between May and June 2012 and will take WEAF when it becomes a CBT in September.

I passed C&R and APii last week (I missed APi exam date) and will take CM on Thursday before taking a break and working as a volunteer at Olympics and Paralympics. APi and indirect tax is booked to sit end September, hopefully I can finish level 3 by end October/mid November.

Good luck with level 4, I have self studied all exams at level 3 so far but think I will either go to classes or use tutorial support in level 4.

Steve

janwal

Hi Steve

Glad I was able to help.

I take my hat off to all of you that self studied I have done mine through college and have found it a struggle with working full time as well.

Enjoy the Olympics and shout if you need help with anything.

Jan