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Select 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 – $18000What is the budgeted payment to trade payables?
Answer
payment=$(450000×70%+18000+10000)= $343000My problem is that I understand everything except adding the 10000.
I would think that decrease in payables would mean less of an expense, right?So why are we adding it to our payments?
Any help is appreciated!
No, it would not mean less of expense.
If they just paid for what they had bought during the month then payables at the end of the month would be the same as they were at the start of the month.
For the payables to be lower at the end of the month then they must have paid more cash.
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