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Hi john sir, plz explain me the following. Point of confusion is discount.
A company makes gross sales for $40,000 per month, of which 10% are for cash, the rest on credit. Experience of receivables shows the following:
Within one month 40%
within two month 50%
settlement discounts ( for payment within one month) 4%Total expected cash receipts in any month will be;
a. $35824
b. $36400
c. $ 38560
d. $40,000It is a very poorly worded question because it could be interpreted in several ways.
However, whichever way I read it, I cannot get one of the 4 answers!!!90% of sales are on credit – so 90% of 40,000 = 36,000.
40% of receivables pay within 1 month and so get the discount – 40% x 36,000 = 14,400
So the discount is 4% x 14,400 = 576.This would mean that the total cash receipts each month should be 40,000 – 576 = $39424.
( The fact that 40% pay in 1 month and 50% pay in 2 months could be meant to mean that the other 10% are those that pay cash. However that is not what it actually says – so the remaining 10% of receivables must take more that 2 months.
Also, it is possible that the cash sales are given the discount also – this would not usually in fact be the case, but even if it were it still does not give one of the 4 answers!!!)
Does the book you got this question from not give an answer?
hmm, John sir this question is from a practice kit and in this practice kit there are really question which confuses.( because of poor wording). The book provide the option ‘a’ as correct one but i can’t depend on his answers.And i solved it in this way but not i am not sure.
10% are cash sales in any month so.. 40,000*10% will be= $4000
Remaining $36000 and we will receive 40% in first month so a discount of 4% will also be given and after discount we will receive $36000*40%*96% = $13824
And in 2nd month $36000*50% = $18000
so in total = 18000+13824+4000= 35824.
But john sir i always follow you And i got what you said in your earlier reply.
I agree with everything you have written from the answer, except…….
What about the other 10% of sales on credit? (40% are in 1 month, 50% are in 2 months, and so there are another 10% who take longer than 3 months).
This means an additional 10% x 36,000 = 3,600.
Which comes to the same total as me: 3600 + 35824 = 39424.
The answer in your book is only correct if it is assumed that the remaining 10% of sales on credit end up never paying 🙂
HMM, i agree with you john sir. I just tried to find out the same answer as provided by book. Thanks john sir for your kind and so informative discussion. i really enjoy your each and every reply. thanks again
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