The Johann's Professional Service Company expects 70% of sales for cash and 30% on 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 (that is, they are "bad debts"). 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

Quizplus · Accepted Answer

First, we need to find the expected credit sales for each month:
- June: $48,000 x 0.3 = $14,400
- July: $54,000 x 0.3 = $16,200
- August: $44,000 x 0.3 = $13,200

Next, we need to calculate the expected cash collected from credit sales for each month:
- June credit sales: $14,400 x 0.2 = $2,880 (collected in July)
- June credit sales: $14,400 x 0.15 = $2,160 (collected in August)
- June credit sales: $14,400 x 0.05 = $720 (bad debts)
- July credit sales: $16,200 x 0.2 = $3,240 (collected in August)
- July credit sales: $16,200 x 0.05 = $810 (bad debts)
- August credit sales: $13,200 x 0.05 = $660 (bad debts)

Finally, we can calculate the expected total cash receipts in August by adding up all of the cash collected:
- Cash sales: $44,000 x 0.7 = $30,800
- Collected from June credit sales: $2,880
- Collected from July credit sales: $3,240
- Collected from August credit sales: $13,200 x 0.8 = $10,560
- Total: $30,800 + $2,880 + $3,240 + $10,560 = $47,480

However, we need to keep in mind that there were $720 of bad debts from June credit sales and $810 of bad debts from July credit sales, so the expected total cash receipts in August should be adjusted for these losses:
- Adjusted total: $47,480 - $720 - $810 = $45,950

The closest answer choice is A) $45,920, which is the best choice.

The Johann's Professional Service Company Expects 70% of Sales for Cash