Question

Assume a merchandising company’s estimated sales for January, February, and March are $110,000, $130,000, and $120,000, respectively. Its cost of goods sold is always 60% of its sales. The company always maintains ending merchandise inventory equal to 25% of next month’s cost of goods sold. It pays for 25% of its merchandise purchases in the month of the purchase and the remaining 75% in the subsequent month. What are the cash disbursements for merchandise purchases that would appear in the company’s cash budget for February?

Answer 1

Description	January	February	March
Estimated Sales	110000	130000	120000
Cost of goods sold @ 60%	(110000×60%) = 66000	(130000×60%) = 78000	(120000×60%) = 72000
Closing stock @ 25% of next month COGS	(78000×25%) = 19500	(72000×25%) = 18000	No information available
Opening stock @ 25% of current month COGS	(66000×25%) = 16500	(78000×25%) = 19500	(72000×25%) = 18000
Purchase = COGS+Closing stock-Opening stock	(66000+19500-16500) = 69000	(78000+18000-19500) =76500	No information available
Cash paid for purchase :
25% of purchase paid in current month		(76500×25%) = 19125
75% of purchase in subsequent month		(69000×75%) = 51750
Total cash disbursement for merchandise purchase in february		(19125+51750) = $ 70875