Question

Hardy Company’s cost of goods sold is consistently 60% of sales. The company plans ending merchandise inventory for each month equal to 30% of the next month’s budgeted cost of goods sold. All merchandise is purchased on credit, and 40% of the purchases made during a month is paid for in that month. Another 45% is paid for during the first month after purchase, and the remaining 15% is paid for during the second month after purchase. Expected sales are: August (actual), $425,000; September (actual), $360,000; October (estimated), $340,000; and November (estimated), $390,000.

Use this information to determine October’s expected cash payments for purchases.

Answer 1

	August	September	October	November
Sales	425000	360000	340000	390000
Cost of goods sold (estimated)	255000	216000	204000	234000
Budgeted ending inventory	64800	61200	70200
Required available inventory	319800	277200	274200
Less: Budgeted Beginning inventory	76500	64800	61200
Required purchases	243300	212400	213000
	­­­­­­­­­­ Purchases paid in ­­­­­­­­­­­­­­­
	August	September	October	After October
August purchases	97320	109485	36495
September purchases		84960	95580	31860
October purchases			85200	127800
	97320	194445	217275	159660
October's expected cash payments for purchases $217275