- This topic has 6 replies, 3 voices, and was last updated 8 years ago by
.
- Posts
As always thank you very much for you help John!
1. selected figures from 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) = 343000However, I don’t understand why it is adding the decrease in trade payables into budgeted payment to trade payables.
Could you please explain?
i understood why the decrease in trade payables added………….actually its because we are paying more of $10000 to decrease the creditors by 10000, so budgeted payment to trade payable will increase by that amount.
But i have one question to sir
increase in cost of inventory held over the month $18000
what does this line mean – cost of inventory (purchase price) has increased or Holding cost of inventory has increased?
It means that the inventory at the end of the month is 18,000 higher than the inventory at the start of the month.
(So in addition to having to purchase goods of (450,000 x 70%) to cover the sales, they had to buy another 18,000 to increase the inventory).
since nothing is being told about opening inventory here in budgetary figure so we can assume it to be 0 .So to keep closing stock at $18000, they need to buy more of goods of $18000 from supplier apart from goods which will cover sales (450000×70%) and so its added to trade payables. am i right?
You do not need to assume the opening inventory is zero!
It does not matter what the opening inventory is – if it increases over the month by 18,000 then they need to spend 18,000 to buy the extra.
okay thanks for clearing that out
one last thing
am i right on this one?The decrease in trade payables by $10000 over the month is added to the budgeted payment to trade payables because……………as we are paying more of $10000 to decrease further the creditors amount by $10000 , so budgeted payment to trade payable will increase by that amount.
- You must be logged in to reply to this topic.