Calculate Cash Disbursments Question Accounting

Question

Answer was 200,156 but I need help with steps as to why :

 

Foxglove Company, a growing retailer, is preparing its budget for the first half of the year assuming the following for sales in each month:
January February March April May June
Sales $200,000 $220,000 $242,000 $266,200 $292,800 $332,00

For budget purposes, the following assumptions are used:

a. The company's Gross Margin is 20%.

b. All merchandise is purchased in the month prior to the month of sale.

c. 75% of merchandise purchases are made on credit with the rest paid in cash.

d. For credit purchases, 30% is paid in the month of purchase, 50% in the month following, and the remaining 20% in the second month after purchase.

e. Half of the Sales are made on Credit with the other 50% in cash each month.

f. Collections on credit sales are expected to be 60% in the month of sale and the remainder in the following month.

g. Selling and administrative expenses of $15,000 per month include $2,500 of depreciation expense.

h. The company incurs interest expense of $1,000 per month which it pays in cash in March and June.

i. Foxglove will be declaring a dividend of $10,000 in February and paying to shareholders in March.

k. The budgeted balance in Retained Earnings on January 31 is $250,000.

Foxglove's budgeted cash disbursements related to merchandise purchases for the month of March would be:

Answer 1

In answering i will focus on the first three month since the problem ask for budgeted cash disbursements related to merchandise purchases for the month of March:

                                                   Jan           Feb            March          April

a) Sales                                       200,000    220,000      242,000       266,200

b) COGS                                      160,000    176,000      193,600       212,960  This is calculated a-b=C

c)  20% Margin                              40,000      44,000        48,400         53,240   The 20% margin was given

 

Merchandise purchases                 176,000    193,600       212,960       

A/P 75%                                      132,000    145,200       159,720                  

 

Cash 25%                                     44,000      48,400        53,240

A/P Jan Payment-75%,30/50/20      39,600     66,000         26,400

A/P Feb               75%,30/50/20                    43,560         72,600        29,040

A/P March            75%,30/50/20                                       47,916        79,860

Total Cash disbursements - March                                    200,156

 

Answer 2

March cash disbursements for merchandise purchases = $200,156

Step 1: Find purchases

Gross margin is 20%, so merchandise cost = 80% of sales.

1. January purchases = 80% of February sales = 0.80 × 220,000 = 176,000
2. February purchases = 80% of March sales = 0.80 × 242,000 = 193,600
3. March purchases = 80% of April sales = 0.80 × 266,200 = 212,960

Because goods are bought 1 month before the month of sale.

Step 2: Figure out how much of each purchase is paid in March

Payment pattern:

1. 25% paid in cash right away
2. 75% bought on credit:
3. 30% of that paid in month of purchase
4. 50% of that paid next month
5. 20% of that paid two months later

So in total:

1. paid in month of purchase = 25% + (75% × 30%) = 47.5%
2. paid next month = 75% × 50% = 37.5%
3. paid two months later = 75% × 20% = 15%

Step 3: March payments

In March, Foxglove pays:

1. 15% of January purchases = 0.15 × 176,000 = 26,400
2. 37.5% of February purchases = 0.375 × 193,600 = 72,600
3. 47.5% of March purchases = 0.475 × 212,960 = 101,156

Total March cash disbursements for merchandise

= 26,400 + 72,600 + 101,156

= $200,156

 March cash paid for merchandise includes:

part of January purchases, part of February purchases, and part of March purchases, based on the payment schedule. That is why you add those three amounts to get $200,156.