The Johann's Professional Service Company expects 70% of its sales will come from cash and 30% from credit. The company collects 80% of its credit sales in the month following sale, 15% in the second month following sale, and 5% are not collected. Expected sales for June, July, and August are $48,000, $54,000, and $44,000, respectively. What are the company's expected total cash receipts in August?

Question

BlackTom AI · Accepted Answer

We start by identifying the components of cash receipts in August and the sources of those receipts.
First, separate each month’s sales into cash and credit portions. The company expects 70% of sales to be cash and 30% to be credit.

Option-by-option analysis:

Option A: $45,920
To verify, compute August cash receipts from two sources:
- Cash sales in August: 70% of August sales = 0.70 × 44,000 = 30,800.
- Collections on credit sales in August: these come from prior months’ credit sales. Since collections are 80% in the month after sale and 15% in the second month after sale, we need July’s and June’s credit sales.
  - June credit sales = 0.30 × 48,000 = 14,400. 15% of these are collected in August: 0.15 × 14,400 = 2,160.
  - July credit sales = 0.30 × 54,000 = 16,200. 80% of these are collected in August: 0.80 × 16,200 = 12,960.
Total August collections from credit sales = 2,160 + 12,960 = 15,120.
Total August receipts = cash sales (30,800) + collections on credit sales (15,120) = 45,920.
This matches Option A, so this option is numerically consistent with the given collection pattern.

Option B: $61,400
If we test this value, we can check whether any miscounts could explain it. The cash component (0.70 × 44,000) is 30,800, which is fixed for August. The maximum possible credit collections in August are from July credit sales (0.80 × 16,200 = 12,960) plus June credit sales (0.15 × 14,400 = 2,160), totaling 15,120. Adding these to 30,800 yields 45,920, not 61,400. Therefore, $61,400 cannot be obtained from the given schedule.

Option C: $87,600
This would require much larger August receipts. Since August cash receipts are bounded by cash sales (30,800) plus credit collections (at most 15,120), the maximum possible total is 45,920, far short of 87,600. Hence this is inconsistent with the collection pattern.

Option D: $100,800
Similar reasoning as Option C: the August receipts cannot exceed the sum of August cash sales and the full credit collections from prior months, which is 45,920. Therefore 100,800 is impossible under the stated collection terms.

Option E: None of the above
Given that Option A aligns exactly with the calculations from the cash vs. credit split and the timing of collections, this option would be incorrect.

In summary, the August receipts are determined by 30,800 from August cash sales plus 15,120 from credit collections (2,160 from June and 12,960 from July), totaling 45,920. The other options either misstate the math or rely on impossible collection totals under the given schedule.

SU25-BL-BUS-A325-5063 Practice Test #3 (new)

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