Link, Inc. purchases materials two months in advance of the month in which they will be sold and their suppliers allow Link, Inc. to pay for purchases one month after the month of the order. Purchases are estimated at 60% of sales. Sales projections are as follows: January - $20,000; February - $25,000; March - $30,000. Calculate cash outflows for the month of February.

Question

Quizplus · Accepted Answer

Materials purchased in February will be sold in April. Purchases are estimated at 60% of sales, so purchases in February will be 60% of $30,000 = $18,000. Suppliers allow Link, Inc. to pay for purchases one month after the month of the order, so the cash outflow for materials purchased in February will be $18,000.

Link, Inc Purchases Materials Two Months in Advance of the Month