[AndreA]

Can someone explain me how to solve this question? I feel so dumb…

AICPA.921135BEC-P2-AR

Lon Co.’s budget committee is preparing its master budget on the basis of the following projections:

Sales $2,800,000
Decrease in inventories 70,000
Decrease in accounts payable 150,000
Gross margin 40%
What are Lon’s estimated cash disbursements for inventories?

$1,040,000.
$1,200,000.
$1,600,000.
$1,760,000. correct

[Mujahid_ Abu Dahda]

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!

[CPAHOPE]

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 1760000

[AndreA]

Thank you very much guys! T account works perfectly.

[Author]

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