Hello professor,
From the problem 60.1, I´m not understanding how to reach the value of DM purchases in December and the Acc.payables at the end of that year. Can you help me please?
Thank you!
Hello Maria Francisca,
1) Regarding your first question — the value of DM purchases in December shown in the cash budget:
The exercise states that merchandise is paid for in the following month. It also says that 70% of merchandise is purchased in the month before the month of sale, and 30% is purchased in the month of sale.
Therefore, the amount you pay in December corresponds to the purchases made in November.
In November, you need to buy:
- 70% of the merchandise that will be sold in December, and
- 30% of the merchandise that will be sold in November.
Since the gross margin is 30% of sales, the cost of merchandise (which is your only manufacturing cost) accounts for 70% of sales (100% - 30%).
So, for the merchandise to be sold in December, you purchase: 70% * sales from december * 70% = (70%*40,000)*70% = 19600€ and for the merchandise to be sold in November, you purchase: (70% * sales november) * 30% = (70% * 54000€)*30% = 11340€.
Adding these together, total purchases made in November amount to 30,940€. This is the ammount of purchases paid in December (because you pay the purchases from november 1 month after) and the ammount that appears in your cash budget in December.
2) Regarding the account payables:
The reasoning is exactly the same, but now applied to all the purchases made in December that will be paid in January (the following month). In this case, you need to purchase 70% of merchandise to be sold in January and 30% of merchandise to be sold in December.
Try to do this on your own, as it follows the exact same logic explained above. If you have any difficulties, ask us again.
Hope it was clear!
Madalena Paiva
1) Regarding your first question — the value of DM purchases in December shown in the cash budget:
The exercise states that merchandise is paid for in the following month. It also says that 70% of merchandise is purchased in the month before the month of sale, and 30% is purchased in the month of sale.
Therefore, the amount you pay in December corresponds to the purchases made in November.
In November, you need to buy:
- 70% of the merchandise that will be sold in December, and
- 30% of the merchandise that will be sold in November.
Since the gross margin is 30% of sales, the cost of merchandise (which is your only manufacturing cost) accounts for 70% of sales (100% - 30%).
So, for the merchandise to be sold in December, you purchase: 70% * sales from december * 70% = (70%*40,000)*70% = 19600€ and for the merchandise to be sold in November, you purchase: (70% * sales november) * 30% = (70% * 54000€)*30% = 11340€.
Adding these together, total purchases made in November amount to 30,940€. This is the ammount of purchases paid in December (because you pay the purchases from november 1 month after) and the ammount that appears in your cash budget in December.
2) Regarding the account payables:
The reasoning is exactly the same, but now applied to all the purchases made in December that will be paid in January (the following month). In this case, you need to purchase 70% of merchandise to be sold in January and 30% of merchandise to be sold in December.
Try to do this on your own, as it follows the exact same logic explained above. If you have any difficulties, ask us again.
Hope it was clear!
Madalena Paiva