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Due to an anticipated continued increase in sales, Mr. Grob intends to increase inventory levels in March 20X4 by $2,000, and it is intended that the payables balance is increased by $3,000 to ease cash flow in the same month.
Sales for March 20X4 was $21,000. Gross profit margin is expected to be 25%.
(I have only written part of the question which is only relevant for this question. Please pardon me.)
Calculate the budgeted payment to suppliers in March 20X4.
The answer is $21,000×0.75 + $2,000 – $3,000 = $14,750
I wanted to know the workings of the calculation. I’m getting an idea of it but I’m not able to grasp the entire thing clearly.
Thank you so much 🙂
If the sales are $21,000, then the cost of sales will be 75% x $21,000 = $15,750.
If the intend to increase inventory levels, then they will need to purchase enough to cover the cost of what is sold plus enough to increase the inventory. So the purchases will be 15,750 + 2,000 = $17,750.
Increasing payables means delaying the payment for that amount, so the amount actually paid will be 17,750 – 3,000 = $14,750.
Thank you so much for replying. Actually I’ve got an exam in 2 days time and you’ve been so kind. Thank you Sir once again and also need your prayers.
About the increase in inventory, I thought increase in inventory would increase payables in turn or maybe it could be that – those 2000 have been included in the payables of 3000 or so (I’m just assuming, I might be awfully wrong.)
The increase in inventory increases the amount that needs to be purchased, and it is purchasing more that increases payables.
That’s exactly what I was thinking. Thank you so much Sir.
It’s pretty much like balancing each account like those we did in FA that’s why I guess we just write cash out for increase in inventory but there’s actually this corresponding payables that increases which is not a cash out. I can kind of recall that now. 🙂
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