[jlondon]

Here’s the question : I feel dumb.. cuz I know this is simple af… but I think I’m blanking out..where do I start??

In preparing its cash budget for July 2012, Reed Company made the following projections:

Sales $1,500,000

Gross profit (based on sales) 25%

Decrease in inventories $70,000

Decrease in accounts payable for inventories $120,000

For July 2012 what were the estimated cash disbursements for inventories?

$935,000

$1,050,000

$1,055,000

$1,175,000 *** Right Answer

Explanation: This answer is correct. The solutions approach is to use T-accounts for inventory and accounts payable to find cash disbursements.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[Mayo]

How I would approach it:

1. You know GP and Sales so you can figure out COGS

2. COGS = Inventory used = sales * (1-GP) = 1.5 M * .75 = 1,125,000 total inventory needed to use

3. Inventories will go down by $70,000. Which means you need to purchase $1,125,000 – $70,000 = $1,055,000 of inventory to make up the difference

4. A/P went down by $120,000 due to inventories. Which means that you disbursed $120,000 cash to pay inventories.

5. So if you need to pay $1,055,000 of inventory and pay off $120,000 of AP = $1,175,000 of cash disbursements for July.

Not sure if I agree with the use of T accounts here. IMO it's more likely to confuse you. But whatever works.

Mayo, BBA, Macc

[Mayo]

How I would approach it:

1. You know GP and Sales so you can figure out COGS

2. COGS = Inventory used = sales * (1-GP) = 1.5 M * .75 = 1,125,000 total inventory needed to use

3. Inventories will go down by $70,000. Which means you need to purchase $1,125,000 – $70,000 = $1,055,000 of inventory to make up the difference

4. A/P went down by $120,000 due to inventories. Which means that you disbursed $120,000 cash to pay inventories.

5. So if you need to pay $1,055,000 of inventory and pay off $120,000 of AP = $1,175,000 of cash disbursements for July.

Not sure if I agree with the use of T accounts here. IMO it's more likely to confuse you. But whatever works.

Mayo, BBA, Macc

[Anonymous]

kind of a bad explanation in that solution…I don't think you can just look at T accounts and come up with an answer. you need a starting point, which is COGS for cash disbursements.

COGS = sales * (1 – gross profit percent) so 1,500,000 * .75 = 1,125,000 cost of goods sold

from there it's a typical cash flows problem. inventory decreased by $70,000. this decrease is an increase to COGS but no cash was disbursed. so you subtract $70,000 from COGS to reduce the expense down to cash actually paid.

AP decreased by $120,000. this decrease is not reflected in COGS but it is a cash disbursement. so you add $120,000 back to COGS to increase the expense up to cash paid.

1,125,000 COGS – 70,000 inventory + 120,000 AP = $1,175,000 cash

[Anonymous]

kind of a bad explanation in that solution…I don't think you can just look at T accounts and come up with an answer. you need a starting point, which is COGS for cash disbursements.

COGS = sales * (1 – gross profit percent) so 1,500,000 * .75 = 1,125,000 cost of goods sold

from there it's a typical cash flows problem. inventory decreased by $70,000. this decrease is an increase to COGS but no cash was disbursed. so you subtract $70,000 from COGS to reduce the expense down to cash actually paid.

AP decreased by $120,000. this decrease is not reflected in COGS but it is a cash disbursement. so you add $120,000 back to COGS to increase the expense up to cash paid.

1,125,000 COGS – 70,000 inventory + 120,000 AP = $1,175,000 cash

[Mamabear]

I used T accounts and got the correct answer.

Whenever a problem says that an account goes down by a certain amount I put that amount as the beginning balance in the T account and use $0 for the ending balance. It doesn't really matter what the real beginning balance and ending balances are because you aren't solving for those. You are trying to see what happened to the account during the period, not what you started or ended with.

Start with Inv because you know BB, EB, and COGS–remember that the JE to book COGS is Debit to COGS and Credit to Inv

BB (debit) = 70,000

– Credit to book COGS = 1,125,000

– EB (debit) 0

Write out the T Account and you can see that the amount of purchases (Debit) to Inv is 1,055,000.

Now solve for what is paid to suppliers by making a T account for A/P

BB (credit) = 120,000

+ purchases (credit) 1,175,000

– EB (credit) 0

= 1,175,000

CPA Exam - Finally DONE (November 2014)
BEC (08/10/13) 80
AUD (08/24/13) 65 (11/13/13) 85
FAR (04/12/14) 81
REG (07/19/14) 69 (11/29/14) 87!!

[Mamabear]

I used T accounts and got the correct answer.

Whenever a problem says that an account goes down by a certain amount I put that amount as the beginning balance in the T account and use $0 for the ending balance. It doesn't really matter what the real beginning balance and ending balances are because you aren't solving for those. You are trying to see what happened to the account during the period, not what you started or ended with.

Start with Inv because you know BB, EB, and COGS–remember that the JE to book COGS is Debit to COGS and Credit to Inv

BB (debit) = 70,000

– Credit to book COGS = 1,125,000

– EB (debit) 0

Write out the T Account and you can see that the amount of purchases (Debit) to Inv is 1,055,000.

Now solve for what is paid to suppliers by making a T account for A/P

BB (credit) = 120,000

+ purchases (credit) 1,175,000

– EB (credit) 0

= 1,175,000

CPA Exam - Finally DONE (November 2014)
BEC (08/10/13) 80
AUD (08/24/13) 65 (11/13/13) 85
FAR (04/12/14) 81
REG (07/19/14) 69 (11/29/14) 87!!

[Mayo]

“kind of a bad explanation in that solution…I don't think you can just look at T accounts and come up with an answer. you need a starting point, which is COGS for cash disbursements.”

Jinx, buy me a coke

Mayo, BBA, Macc

[Mayo]

“kind of a bad explanation in that solution…I don't think you can just look at T accounts and come up with an answer. you need a starting point, which is COGS for cash disbursements.”

Jinx, buy me a coke

Mayo, BBA, Macc

[jlondon]

@mayo @dragnets @mamabear

Thank you all for the explanations ! Much more clear to me, especially with Mayo's explanation. That is what should actually be in an “explanation”.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[jlondon]

@mayo @dragnets @mamabear

Thank you all for the explanations ! Much more clear to me, especially with Mayo's explanation. That is what should actually be in an “explanation”.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[Mayo]

Glad that helped. I forgot to add that…

“4. A/P went down by $120,000 due to inventories. “

….is a red herring of sorts. It's meant to confuse you and think that it's supposed to be subtracted from the inventory you will need. It's not. It's merely $120k in AP from a previous period that's unrelated to the forecasted period.

It could have easily read, “AP went down $120k due to gummy bear expenses”; or “clown makeup classes”; Or “volcano insurance” (let's not resurrect that thread again :P); In the end, it's cash paid out and added to cash disbursements.

Mayo, BBA, Macc

[Mayo]

Glad that helped. I forgot to add that…

“4. A/P went down by $120,000 due to inventories. “

….is a red herring of sorts. It's meant to confuse you and think that it's supposed to be subtracted from the inventory you will need. It's not. It's merely $120k in AP from a previous period that's unrelated to the forecasted period.

It could have easily read, “AP went down $120k due to gummy bear expenses”; or “clown makeup classes”; Or “volcano insurance” (let's not resurrect that thread again :P); In the end, it's cash paid out and added to cash disbursements.

Mayo, BBA, Macc

[Mamabear]

If you understand JEs and T accounts the explanation given makes perfect sense. I understand that you have to calculate COGS first, but the explanation is correct that you use T accounts for Inv and A/P to arrive at cash disbursements. I write out T accounts for everything because it is easier than memorizing formulas, when to subtract, add, etc.

CPA Exam - Finally DONE (November 2014)
BEC (08/10/13) 80
AUD (08/24/13) 65 (11/13/13) 85
FAR (04/12/14) 81
REG (07/19/14) 69 (11/29/14) 87!!

[Mamabear]

If you understand JEs and T accounts the explanation given makes perfect sense. I understand that you have to calculate COGS first, but the explanation is correct that you use T accounts for Inv and A/P to arrive at cash disbursements. I write out T accounts for everything because it is easier than memorizing formulas, when to subtract, add, etc.

CPA Exam - Finally DONE (November 2014)
BEC (08/10/13) 80
AUD (08/24/13) 65 (11/13/13) 85
FAR (04/12/14) 81
REG (07/19/14) 69 (11/29/14) 87!!

[Mayo]

“If you understand JEs and T accounts the explanation given makes perfect sense.”

Yeah, but you can insert anything in place of “JEs and T accounts” and it might not make sense to one person or another. For example, using the words “taxes” or “women” would make the statement false 😛

Seriously though, I think both ways are valid. I just took exception to the explanation, since saying “use T accounts” doesn't really explain how. Regardless, I love T accounts, and still use them in my job when an entry or account doesn't make sense to me.

Mayo, BBA, Macc

[Author]

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