Question

Wichita Industries' sales are 10% cash and 90% on credit. Credit sales are collected as follows: 30% in the month of sale, 50% in the next month, and 20% in the following month. On December 31, the accounts receivable balance includes $12,000 from November sales and $42,000 from December sales. Assume that total sales for January are budgeted to be $50,000. What are the expected cash receipts for January from the current and past sales?
A. $18,500.
B. $51,500.
C. $51,900.
D. $55,500.
E. $60,500

Answer 1

Answer:

E. $60,500

Explanation:

The expect cash receipts for January include: 20% of all November credit sales, 50% of all December credit sales, 100% of January cash sales and 30% of January credit sales.

The $12,000 accounts receivable from November will be received in full in January.

The $42,000 accounts receivable from December correspond to the 70% to be received over January and February. The amount received in January is:

$AR_{Dec}=\ 42,000*\frac{0.5}{0.7}\\AR_{Dec}=\ 30,000$

The amount received from January cash sales is:

$Cash_{Jan} = \ 50,000*0.1\\Cash_{Jan} = \ 5,000$

The amount received from January credit sales (30%) is:

$Credit_{Jan} = \ 50,000*0.9*0.3\\Credit_{Jan} = \ 13,500$

The total cash amount (T) received in January is:

$T=\ 12,000+ 30,000+ 5,000+ 13,500\\T=\ 60,500$