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a firm’s budget for next month are as follows:
sales $450000
gross profit on sales 30%
decrease in trade payables over the month $10000
increase in cost of inventory held over the month $18000What is the budgeted payment to trade payables?
The answer says
$((450000 x 70% + 18000 + 10000) = 343000Sir I don’t understand why it is adding the decrease in trade payables into budgeted payment to trade payables ? Shouldn’t it be substracted ? Bcos effectively inventory has been added as there is an increase
If they had paid the same amount as what they had bought, then they would still be owing the same at the end of the month as at the beginning of the month – the payables would not change.
But if they end up owing less at the end of the month, then it must mean that they had paid out more than what they had bought.
But Sir, Due to a decrease in trade payable, the company owes less now so the amount should have been deducted to what we pay(i.e. we should have paid them less, due to less payables held now)
Still if I take your explanation into consideration. Then how would we explain the increase in cost of inventory that has been added. If they owe more surely they paid less before.
Still not able to comprehend Sir. Can you please help me I have an exam soon this week 🙁
Suppose we owe 200 at the start of the month; we buy goods for 1,000, so we now owe 1,200. Suppose at the end of the month we only owe 100. That means that we must have paid 1,200 – 100 = 1,100.
There is no connection between inventory and payables.
If the level of inventory does not change, then they will buy the same amount as they use. If they increase the inventory during the month, then it must mean that they have bought more than they used.
Have you watched my free lectures on this? The lectures are a complete free course and cover everything needed to be able to pass the exam well.
Yes sir i have watched all the lectures.
And thank you for that example. It made a lot of sense to me now. Thank you so very much for your help and all that you do for us.
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