[Anonymous]

Hi,

I’m having a bit of trouble with this question, so if someone can help that would be great!

In preparing its cash budget for July 2008, Reed Company made the following projections:

Sales

$1,500,000

Gross profit (based on sales)

25%

Decrease in inventories

$ 70,000

Decrease in accounts payable for inventories

$ 120,000

For July 2008 what were the estimated cash disbursements for inventories?

A. $ 935,000

B. $1,050,000

C. $1,055,000

D. $1,175,000

The Answer is D.

Can someone explain how they arrive at Answer D?

Thanks.

[Anonymous]

Well CPABLUES… You first start out with the amount of sales which is 1.5 million. You take that time 75% which would be the cost of the inventory sold during the year as you are taking out the 25% profit which brings you to 1,125,000. You then subtract 70,000 out of that since your inventory went down which means that of the 1,125,000 cost of sales 70,000 was from using prior inventory and thus not paid for in the current period which brings you to 1,055,000. Since you're A/P for inventory went down (meaning you paid money toward the inventory) you have to add that to your 1,055,000 which brings you to the answer of 1,175,000. That should do it for you.

[Author]

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