Question

Desired ending inventory levels are 25% of the following month's projected cost of goods sold. The company purchases all inventory on account. January 2014 budgeted purchases are $150,000. The normal schedule for inventory payments is 60% payment in month of purchase and 40% payment in month following purchase. Budgeted cash payments for inventory in February 2014 would be:

Answer 1

To calculate the budgeted cash payments for inventory in February 2014, multiply the budgeted purchases for January 2014 by the desired ending inventory level. Then, determine the payment schedule and calculate the amount to be paid in February.

Step-by-step explanation:

To determine the budgeted cash payments for inventory in February 2014, we need to calculate the amount of inventory purchased in January and the portion that will be paid in February.

Step 1: Calculate projected cost of goods sold

Projected cost of goods sold for February 2014 can be calculated by multiplying the budgeted purchases for January 2014 ($150,000) by the desired ending inventory level (25%).

Projected cost of goods sold = $150,000 x 0.25 = $37,500

Step 2: Determine payment schedule

The normal schedule for inventory payments is 60% in the month of purchase and 40% in the month following purchase.

Amount paid in January = $150,000 x 0.6 = $90,000

Amount to be paid in February = $150,000 x 0.4 = $60,000

Step 3: Calculate budgeted cash payments for inventory in February 2014

The budgeted cash payments for inventory in February 2014 would be the amount to be paid in February ($60,000).