Question

The Hernandez Company estimates its cash collections from its sales as follows:

                        30% cash

                        70% on account

Of the credit sales the collection pattern is as follows:

                        60% in month of sales

                                    80% of these receive a 5% cash discount

                                    20% do not qualify for a discount

                        30% are collected in month following sale

                        8% are collected two months after sale

                        2% are uncollectible

If S_i is the sales dollars in month i, (note that i-1 refers to the month prior, and i+1 refers to the upcoming month, etc.) then the cash receipts in month i can be estimated as follows:

  

Group of answer choices

0.3Si + (0.7) (0.6) [(0.8) (0.95)Si + 0.2Si] + (0.7) (0.3)Si+1 + (0.7) (0.08)Si+2

0.3Si + (0.7) (0.6) [(0.8) (0.95)Si + 0.2Si] + (0.7) (0.3)Si-1 + (0.7) (.08)Si-2

0.3Si + (0.7) [(0.6)Si + 0.3Si-1 + 0.08Si-2]

0.3Si + (0.6) (0.8) (0.95)Si + (0.6) (0.2)Si + 0.3Si-1 + 0.08Si-2

Answer 1

The answer is

0.3Si + (0.7) (0.6) [(0.8) (0.95)Si + 0.2Si] + (0.7) (0.3)Si-1 + (0.7) (.08)Si-2

we can understand this equation step-by-step

step1:

0.3Si

It represent 30% cash receipt of this month

step2:

(0.7) (0.6) [(0.8) (0.95)Si + 0.2Si] - it has 2 paarts in it

first part is, of the balance 70% of this month, 60% will be received in this month. in that 60%, 80% is liable for cash discount of 5% (of 80%).

second part is, 20% of the above mentioned 60% is not liable for cash discount. it will receive in this month itself as it is.

step3:

(0.7) (0.3)Si-1

It represent 30% of the last month uncolleccted 70% sales

step4:

(0.7) (.08)Si-2

It represent 8% of uncollected 70% of two month before sale. remainig 2% is not included in the equation becuase it is uncollectable