Ending Inventory Question Managerial Accounting

Question

The data below regards The Bag House, a store that sells bags.

Budgeted Sales (credit) : For January, February, and March, are $420,000, $310,000, and $280,000. 

Budgeted Collections : 60% in month of sale, 30% in following month, and 10% uncollectible

Cost of Goods sold : 50% of sales

Purchases of Merchandise: 30% in month prior to sale, and 70% in month of sale

Payment for Purchases : 80% in month of purchase and 20% in following month

Selling and Admin Costs : $32,500 paid in cash monthly

Depreciation of Equipment : $21,500 monthly

Question : What is the cash disbursement for purchases of merchandise in February?

A) 165,500 B) 159,100 C) 149,750 D) 153,000 E) None

Solution shows 159,100 but I don't get their steps as to how:

They started with budgeted sales for February of 310,000 and then showed COGS of $155,000 (1/2 of 310,000 I know that), and then they add ending inventory of $42,000 (I don't understand where this comes from), and then they subtract beginning inventory of 46,500 ( I don't get where this comes from, i.e. the math, I know it comes from January), to get required purchases of 150,500. Prior to this they showed the same thing for January, with budgeted sales of 420,000, then COGS of 210,000, then they added ending inventory of 46,500 (don't get where it came from) and then they subtract beginning inventory of 63,000 to get required purchases of 193,500.

 

I understand the end steps : 0.8 x February Required Purchases + 0.2 x January Required Purchases where I plug in the above numbers to get $159,100 but again I don't get how to calculate the beginning and ending inventory for January and the ending inventory for February.

 

Thanks for your help in advance.

Answer 1

Your Question and Your Statement:
What is the cash disbursement for purchases of merchandise in February? I don't get how to calculate the beginning and ending inventory for January and the ending inventory for February.

Answer: Accountants must use Generally Accepted Accounting Principles (GAAP) as recognized by AICPA (American Institute of Certified Public Accountants) Council, AICPA Industry Guides, Industry Practice, Code of Professional Ethics, FASB (Financial Accounting Standards Board)

 

For this problem: Cost of Goods Sold (COGS) is presented as 50% of sales

do not use January account balances, percentages, selling admin expenses, depreciation..

 

GAAP standard formula:

Beginning inventory plus purchases minus Ending Inventory = Cost of Goods Sold (COGS)

 

GAAP standard formula:
Ending inventory - Beginning inventory + Cost of goods sold = Inventory Purchases

 

 

 

 

Answer 2

first, sales expenses, depreciation, and budget collection were irrelevant

 

let's look at the monthly cash requirements

January          sales: $420,000

                     COG:    210,000    

1. 30% bought in December = 30% of $210,000 = $63,000

2. amount purchased in January = $210,000 - 63,000 = $147,000

3. 80% of $147,000 will be paid in January, and 20% will be paid in

     February = $29,400

4. purchases for February = 30% of $155,000 = $46,500

5. of $46,500, 80% will be paid in January leaving $9,300 carryover 

 

February         sales: $310,000

                      COG:   155,000

1. carryover from January = $29,400 + 9,300 = $38,700

2. February purchases = 155,000 - 46,500 bought in Jan = $108,500

3. 80% payment of February purchases = $86,800

4. purchases for March = 30% of $140,000 = $42,000

5. payment for March = 80% of $42,000 = $33,600

Cash requirement for February = carryover from Jan = $38,700

February payment = $86,800; purchase for March = $33,600 = $159,100