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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?
A 25%
B 30%
C 35%
D 55%HI SIR CAN YOU PLEASE EXPLAIN HOW TO SOLVE THIS BECAUSE I CANT UNDERSTAND THE SOLUTION GIVEN IN THE BOOK
HERE IS THE SOLUTIOON IN BOOK:
Consider sales of $100
Cash receipt in month of sale = 45% × 100 = $45
This is after a discount of 10%, so must represent 45/0.9 = $50 of sales value
Irrecoverable debts = 20% of any month’s sales = $20
The receipts in month 2 must be the rest of the sales = 100 – 50 – 20 = $30
$30/$100 × 100 = 30%I DONT GET THE DISCOUNTING PART AT ALL
Suppose a customer decides to pay an invoice of $100 in the month of sale. They will get a 10% discount and so will only pay $90 and the company will receive $90 in cash.
So for every $90 cash received in the month of sale, it will have paid for an invoice of $100.
Therefore if the company received $45 in the month of sale then it will have paid for an invoice of 100/90 x $45 = $50. (The customer paid an invoice of $50 but took a discount of $5).
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