Payne Company provided the following information relevant to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: Desired ending inventory levels are 25% of the following month's projected cost of goods sold. The company purchases all inventory on account. January Year 2 budgeted purchases are $150,000. The normal schedule for inventory payments is 60% payment in month of purchase and 40% payment in month following purchase.
Budgeted cash payments for inventory in February Year 2 would be:

Question

Payne Company provided the following information relevant to its inventory sales and purchases for December Year 1 and the first quarter of Year 2:  Desired ending inventory levels are 25% of the following month's projected cost of goods sold. The company purchases all inventory on account. January Year 2 budgeted purchases are $150,000. The normal schedule for inventory payments is 60% payment in month of purchase and 40% payment in month following purchase.
Budgeted cash payments for inventory in February Year 2 would be:

Quizplus · Accepted Answer

Budgeted purchases of inventory = Budgeted cost of goods sold + Desired ending inventory - Beginning inventory
Budgeted purchases of inventory in February = Budgeted cost of goods sold + (Budgeted cost of goods sold in March × 25%) - (Budgeted cost of goods sold in February × 25%)
Budgeted purchases of inventory in February = $180,000 + ($120,000 × 25%) - ($180,000 × 25%) = $180,000 + $30,000 - $45,000 = $165,000
Budgeted cash payments for inventory in February = (January purchases × Percent paid in month following month of purchase) + (February purchases × Percent paid in month of sale)
Budgeted cash payments for inventory in February = ($150,000 × 40%) + ($165,000 × 60%) = $60,000 + $99,000 = $159,000

Payne Company Provided the Following Information Relevant to Its Inventory