Question

Tall Guys Clothing has a 45-day collection period. Sales for the next calendar year are estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume a year has 360 days.

(A)The firm will collect a total of $800 in Quarter 2.
(B) The accounts receivable balance at the beginning of Quarter 4 will be $1,150.
(C) The firm will collect a total of $2,000 in Quarter 3.
(D) The firm will have an accounts receivable balance of $2,300 at the end of the year.
(E) The firm will collect a total of $2,400 in Quarter 4.

Answer 1

Answer:

(E) The firm will collect a total of $2,400 in Quarter 4.

Explanation:

We will calcualte under two assumptions:

1. the sales are done uniformly over the quarter
2. and the collection period is the same over the entire year

With this we conclude the following:

each quarter has 90 days

the sales from day 1 to 45 will be collected within the quearter while the sales from 46 to 90 will be collected on the next quarter.

so half the sales will be collected during the quarter as sales are done uniformly.

Collection on Q1

2,100 / 2 = 1,050

collection on Q2

1,050 + 1,600/2 = 1,850

collection on Q3

800 + 2,500/2 =2,050

collection on Q4

1,250 + 2,300/2 = 2,400