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A company has a two-month receivables cycle. It receives in cash 45% of the total gross
sales value in the month of invoicing. Irrecoverable debts are 20% of total gross sales value
and there is a 10% discount for settling accounts within 30 days.
What proportion of the first month’s sales will be received as cash in the second month?
Cash receipt in month of sale is = 45$
Irrecoverable debt is = 20$
And the rest of the sales must be 35%.
But the answer is 30%. And I don’t understand why.
Thanks in advance
The cash received in the month of invoicing will be after getting a 10% discount.
Given that the cash received is 45% of the sales, the invoices for which the payment is received must be 45 / 90% = 50% of the sales.
(For every $100 invoiced, $50 of the invoices are paid within one month but because of the discount only $45 cash is received.)
Therefore 50% of the sales are paid in 1 months, 20% are irrecoverable, leaving 30% paid in the second month.
Now I get it. Thank you
You are welcome 🙂