Question

Hardy Company's cost of goods sold is consistently 60% of sales. The company plans ending merchandise inventory for each month equal to 20% 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), $385,000; September (actual), $410,000; October (estimated), $330,000; and November (estimated), $380,000. Use this information to determine October's expected cash payments for purchases.

Answer 1

Calculate Monthly Purchases
	August	September	October	November
Budgeted ending inventory	49200 [ 246000*20% ]	39600 [ 198000*20% ]	45600 [ 228000*20% ]
Cost of goods sold (estimated)	231000 [ 385000*60% ]	246000 [ 410000*60% ]	198000 [ 330000*60% ]	228000 [ 380000*60% ]
Required available inventory	280200	285600	243600
Budgeted beginning inventory	46200	49200	39600
Required purchases	234000	236400	204000

Note : Beginning inventory of August = Ending inventory of July = 20% * August's cost of goods sold = 20% * 231000

46200

Calculate payments made for inventory:
		Purchases paid in
	Purchases	August	September	October	After October
August purchases	234000	93600 [ 234000*40% ]	105300 [ 234000*45% ]	35100 [ 234000*15% ]
September purchases	236400		94560 [ 236400*40% ]	106380 [ 236400*45% ]	35460 [ 236400*15% ]
October purchases	204000			81600 [ 204000*40% ]	122400 [ 204000*60% ]
				223080
Determine October's Expected Cash payments for Purchases.
October's expected cash payments for purchases	223080