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The following items were extracted from a company’s budget for next month:
Purchases on credit $360,000
Expected decrease in inventory over the month $12,000
Expected increase in trade payables over the month $15,000
What is the budgeted payment to trade payables for the month?A. $333,000
B. $345,000
C. $357,000
D. $375,000I chose D, however, the correct answer is B. I thought the increase in payables should be added to the credit purchase amount for the month (15000 + 360000 =375000). Anyway, the increase in payables was deducted from it. Can you please explain why?
Budgeted payment to trade payables
= Purchases on credit – Expected increase in trade payables
= $360,000 – $15,000
= $345,000Therefore, the budgeted payment to trade payables for the month is $345,000.
Because you have bought $360k purchases on credit, then you have an expected $15k increase in trade payables (This is expected to be billed to the company by its suppliers for goods delivered to or services consumed by the firm in the ordinary course of business over the month)
The increase in payables is not added to the credit purchase amount because it represents the expected increase in trade payables, which is a liability. It is deducted from the purchases on credit to determine the net payment to trade payables for the month.
Budgeted payment to trade payables
= Purchases on credit – Expected increase in trade payables
= $360,000 – $15,000
= $345,000Therefore, the budgeted payment to trade payables for the month is $345,000.
Because you have bought $360k purchases on credit, then you have an expected $15k increase in trade payables (This is expected to be billed to the company by its suppliers for goods delivered to or services consumed by the firm in the ordinary course of business over the month)
The increase in payables is not added to the credit purchase amount because it represents the expected increase in trade payables, which is a liability. It is deducted from the purchases on credit to determine the net payment to trade payables for the month.
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