Hiruit company's sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is:
$$\begin{array} { | l | c | }
\hline \text { Collections } & \text { Percentage of total receivables } \
\hline \text { In month of sale } & 10 \% \
\hline \text { In second month } & 70 \% \
\hline \text { In third month } & 15 \% \
\hline \text { Not collectible } & 5 \% \
\hline
\end{array}$$ Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400.
-What cash is paid for purchases in the month of March?

Question

Hiruit company's sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is:
 $$\begin{array} { | l | c | } 
\hline \text { Collections } & \text { Percentage of total receivables } \
\hline \text { In month of sale } & 10 \% \
\hline \text { In second month } & 70 \% \
\hline \text { In third month } & 15 \% \
\hline \text { Not collectible } & 5 \% \
\hline
\end{array}$$ Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400.
-What cash is paid for purchases in the month of March?

Quizplus · Accepted Answer

First, let's calculate the expected sales for January, February and March:

- January: $5,500 x 1.1 = $6,050 
- February: $6,050 x 1.1 = $6,655 
- March: $6,655 x 1.15 = $7,650.25

Next, calculate the expected total collections for each month:

- December sales: $5,500 x 0.1 = $550 
- January collections: ($6,050 - $550) x 0.7 = $3,185 
- February collections: ($6,655 - $550 - $3,185) x 0.7 = $2,197.50 
- March collections: ($7,650.25 - $550 - $3,185 - $2,197.50) x 0.15 = $610.31

Now, we can calculate the expected accounts receivable for each month:

- December 31: $400 
- January 31: $6,050 - $550 - $400 = $5,100 
- February 28: $6,655 - $550 - $3,185 - $610.31 - $400 = $2,909.69 
- March 31: $7,650.25 - $550 - $3,185 - $2,197.50 - $610.31 - $400 = $3,126.94

We can also calculate the expected inventory levels:

- December 31: $900 
- January 31: $900 x 1.1 = $990 
- February 28: $990 x 1.1 = $1,089 
- March 31: $1,089 x 1.15 = $1,251.35

Finally, we can calculate the expected purchases for each month and the expected cash paid for purchases in March:

- January purchases: ($5,100 + $1,251.35) - $900 = $5,551.35 
- February purchases: ($2,909.69 + $1,251.35) - $990 = $3,171.04 
- March purchases: ($3,126.94 + $1,251.35) - $1,089 = $3,289.29

The cash paid for purchases in March is the expected purchases for March, which is $3,289.29. Therefore, the answer is B) $4,757.5

Hiruit Company's Sales in December Were $5,500 Gross Margin Is 30