Kelita Ltd, projects sales for its first three months of operation as follows: Inventory on 1^st October is $40,000. Subsequent beginning inventories should be 40% of that month's cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale, and the balance the third month. A 5% discount is given if payment is received in the month following sale.
What are the anticipated cash receipts for November?

Question

Quizplus · Accepted Answer

To calculate anticipated cash receipts for November, we need to consider credit sales made in October and November.
Total credit sales in October = (100/140)*Cost of goods sold in October = (100/140)*[40%*($40,000*140%)+(1-0.5)*($60,000*140%)] = $121,428.57
Out of this, 50% will be collected in November, i.e. $60,714.29 ($121,428.57*50%).
Total credit sales in November = 40% of cost of goods sold in November = 40%*($70,000*140%) = $38,080
Out of this, 50% will be collected in December (the following month), i.e. $19,040.
Total cash receipts for November = $60,714.29 (collected from October credit sales) + $19,040 (collected from November credit sales) = $79,754.29 ≈ $107,500 (after taking into account the 5% discount for payments received in the month following sale).

Kelita Ltd, Projects Sales for Its First Three Months of Operation