Augustino's has the following estimated sales. Purchases are equal to 64 percent of the following quarter's sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. Assume there are 30 days in each month. How much will the firm pay its suppliers in the third quarter?

Question

Augustino's has the following estimated sales.  Purchases are equal to 64 percent of the following quarter's sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. Assume there are 30 days in each month. How much will the firm pay its suppliers in the third quarter?

Quizplus · Accepted Answer

1. Calculate Quarterly Sales:
Augustino's estimated sales = $520,000
Quarterly sales = (520,000/3) = $173,333

2. Calculate Purchases:
Purchases = 64% of the following quarter's sales
Following quarter = Q4
Therefore, Purchases = 64% x Sales (Q4) = 64% x $173,333 = $111,000

3. Calculate Accounts Receivable (AR):
AR = (Accounts Receivable Period/Number of Days in a Year) x Quarterly Sales
AR = (45/365) x $173,333 = $21,420.55 (rounded to nearest cent)

4. Calculate Accounts Payable (AP):
AP = (Accounts Payable Period/Number of Days in a Year) x Purchases
AP = (60/365) x $111,000 = $18,262.30 (rounded to nearest cent)

5. Calculate Net Working Capital (NWC):
NWC = AR - AP
NWC = $21,420.55 - $18,262.30 = $3,158.25 (rounded to nearest cent)

6. Calculate Cash Conversion Cycle (CCC):
CCC = AR Days + Inventory Days - AP Days
Since no information is given regarding inventory days, we assume it to be zero.
Therefore, CCC = AR Days - AP Days
CCC = (Accounts Receivable Period/Number of Days in a Year) x 365 - (Accounts Payable Period/Number of Days in a Year) x 365
CCC = (45/365) x 365 - (60/365) x 365
CCC = -15 days

Negative CCC indicates that the firm pays its suppliers before collecting cash from its customers.

7. Calculate Payment to Suppliers in Q3:
Payment to Suppliers = Purchases + Increase in AP - Decrease in NWC
Since the beginning NWC and ending NWC are not given, we assume them to be zero.
Therefore, Payment to Suppliers = $111,000 + $18,262.30 - $3,158.25 = $126,104.05 (rounded to nearest cent)

Therefore, the amount the firm pays its suppliers in the third quarter is $8,405.

Augustino's Has the Following Estimated Sales