April 11, 2020 at 10:07 pm #2979365AndreAParticipant
Can someone explain me how to solve this question? I feel so dumb…
Lon Co.'s budget committee is preparing its master budget on the basis of the following projections:
Decrease in inventories 70,000
Decrease in accounts payable 150,000
Gross margin 40%
What are Lon's estimated cash disbursements for inventories?
$1,760,000. correctApril 11, 2020 at 11:13 pm #2979401Mujahid_ Abu DahdaParticipant
hey, I think I can try:
First, you have to find purchases figure by drawing up a simple income statement. Note here that inventory decrease has been figure (so no need for an opening and closing inventory). Gross margin is given as 40% of sales, so profit is $1,120. COGS is sales – Gross profit. Hence COGS is $1680. You need purchases to always get COGS, so purchases is COGS – inventory decrease, which is $1610. Note also that if the question had given inventory increase, then purchases would have been the opposite.
Next you move onto your payable control account, since the objective is to find the cash actually paid for inventory. Here a figure for decrease in account payable has been given. A decrease has a positive relationship with purchases figure. So amount paid for inventory would be : Purchases figure plus decrease in account payable i.e. $1610 + $150 = $1760. Note an increase in account payable would have been a deduction from purchases figure
Hope this helps!April 12, 2020 at 12:20 am #2979446CPAHOPEParticipant
Create a T account to find Purchase. If inventory decreased by 70k that means B inventory is 140K.
140K + P – 1680000 = 70000 Solve for P and you get 1610000
Add 150k since AP decreased and you will get 1760000April 12, 2020 at 2:19 pm #2979650AndreAParticipant
Thank you very much guys! T account works perfectly.