Question

Limitless Styles has a 45 day accounts payable period. The firm has expected sales of $900, $1,200, $1,900, and $2,600, respectively, by quarter for the next calendar year. The cost of goods sold for a quarter is equal to 70% of the next quarter sales. The firm has a beginning payables balance of $600 as of quarter one. What is the amount of the projected cash disbursements for accounts payable for Quarter 3 of the next year? Assume that a year has 360 days.

Answer 1

The projected cash disbursements for accounts payable for Quarter 3 for Limitless Styles is calculated to be $2,240. This figure is based on sales forecasts, cost of goods sold, and the accounts payable period. The calculations involve understanding the payments structure and the timing of the payable period in relation to sales and COGS.

Step-by-step explanation:

The student is asking about calculating projected cash disbursements for accounts payable for a business in Quarter 3, based on provided sales forecasts and costs of goods sold percentages. Limitless Styles has a 45 day accounts payable period, and the cost of goods sold (COGS) is 70% of the following quarter's sales. The starting payables balance is $600 for Quarter 1.

To find the projected cash disbursement for Quarter 3, we first calculate the COGS for Quarter 3, which is 70% of Quarter 4 sales:
0.70 × $2,600 = $1,820. The payables for Quarter 3 will include this COGS plus any carryover from the previous quarter, less payments made during the quarter.

The payable period is 45 days, which means payments made in Quarter 3 will cover purchases made 45 days before, i.e., during the latter part of Quarter 2. So, we need to calculate the COGS for the latter part of Quarter 2 accordingly. Since there are 90 days in a quarter, and a year has 360 days, each quarter has 1/4 of a year. So, the COGS for the last 45 days of Quarter 2 is half of the COGS for the entire Quarter 3:
$1,820 / 2 = $910.

The beginning payables for Quarter 3 will be the ending payables of Quarter 2, which includes COGS from Q2 purchases destined to be paid in Q3 (45 days period), hence COGS of Q2:
0.70 × $1,900 = $1,330. So we start Quarter 3 with $1,330 in payables.

To calculate the total cash disbursements for Quarter 3, we have to pay the beginning balance plus the purchases during the first 45 days of Q2, but subtract the purchases paid from the previous period (last 45 days of Q2):
$1,330 + $1,820 - $910 = $2,240.

The projected cash disbursements for accounts payable for Quarter 3 is $2,240.