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Q:
Selected figures from a firm’s budget for next month are as follows.
Sales $450,000
Gross profit on sales 30%
Decrease in trade payables over the month $10,000
Increase in cost of inventory held over the month $18,000
What is the budgeted payment to trade payables?
A $343,000 B $323,000
C $307,000 D $287,000Answer: Payment = $(450,000 × 70% + 18,000 + 10,000) = $343,000
I did not understand why (Decrease in trade payables) $10,000 should be added to calculate the budgeted payment.
Let me explain with a little example.
Suppose you start the month owing 10,000. During the month you buy goods for 100,000.
So if you paid nothing you would then owe 110,000.If you had paid only 90,000 then you would be owing 110,000 – 90,0000 = 20,000, so payables would have increased.
However if you had paid 105,000 then you would be owing only 110,000 – 105,000 = 5,000, so payables would have decreased.For payables to have decreased you must have paid more than what you bought during the month.
I hope that makes sense 🙂
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