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January sales are $68,000, of which 20% are for cash and the rest on account, and 40% of sales on account are collected in the month of sale. What are total January cash collections from sales?
A$27,200
B$54,400
C$35,360
D$21,760
Answer & Solution
Correct answer: C. $35,360
1. Cash sales are 20% of $68,000, which is $13,600 collected immediately.
2. Sales on account are the other 80%, which is $54,400.
3. Of those, 40% are collected in the month of sale, giving $54,400 times 40%, or $21,760.
4. January is the first month of operations, so there are no earlier months to collect from.
5. Total January collections are $13,600 plus $21,760, which is $35,360.
6. $21,760 counts only the receivables collected and forgets the cash sales.
7. $54,400 is the full amount sold on account, most of which is collected in later months.
8. $27,200 is half of the receivables, the 50% that arrives in February rather than in January.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 7.10 Cash Budget_
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