A company has forecast sales in the first three months of the year as follows (figures in millions): January,$200; February,$140; March,$100.50% of sales are usually paid for in the month that they take place,30% in the following month,and the final 20% in the month after that.Receivables at the end of December were $100 million.What are the forecasted collections on accounts receivable in March?

Question

Quizplus · Accepted Answer

The total sales for January, February, and March are $200 million, $140 million, and $100.5 million, respectively. 
Since 50% of sales are paid for in the month they take place, January sales will result in $100 million of collections in January. Similarly, February sales will have $42 million collected in February (30%) and $28 million collected in March (20%). Finally, March sales will have $30.15 million collected in April (30%) and $20.1 million collected in May (20%). Therefore, the total collections in March will be $100 million + $28 million + $20.1 million = $148.1 million. However, the question only asks for the portion of sales that are still unpaid (the receivables). Therefore, the amount of receivables in March will be $28 million (the 30% of February sales that are unpaid in March) plus $100.5 million (the total amount of March sales) minus the $20.1 million (the 20% of March sales that will not be paid until May). This simplifies to $28 million + $100.5 million - $20.1 million = $108.4 million, which is the answer if the question had asked for the amount of receivables at the end of March. However, the question asks for the amount of collections in March, which is the amount of receivables at the end of February minus the amount of receivables at the end of March. Therefore, the answer is $100 million - $108.4 million = -$8.4 million. However, this negative value indicates that there will be a shortfall in collections in March compared to the amount of receivables at the end of February. To find the absolute value of the shortfall, we take the negative of -$8.4 million, which is $8.4 million. Therefore, the forecasted collections on accounts receivable in March are $100 million - $8.4 million = $91.6 million, which rounds up to $92 million (Answer D).

A Company Has Forecast Sales in the First Three Months