Cash Budget-Solution to Claras's Problem related to AAT Sample Assessment 1-Task 3c

ManiGoldwater

A company has supplied information regarding its forecast sales, labour costs and purchases:
Purchases: The company pays its suppliers on the basis of
25% one month after the date of purchase, 45% two months after the date of purchase and 30% three months after the date of purchase. At the end of period 3 the balance of trade payables is forecast to be:
Balance from period 1 =£18,200
Balance from period 2 =£60,000
Balance from period 3 =£105,500
What is settlement of month 3 trade payables for month 4 and month 5

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Solution:
The question is really asking to calculate payments that will be made in period 4&5.
To do this we need to find out the original purchase amount which is missing in the question.
So we will make a simple key of purchase payment as follows:
Purchase Payments Key:
one month after: 25%
two months after: 45%
three months after: 30%

So the payments schedule will follow the following pattern:
For purchases made in PR-1:
Payments will be 25% in period 2; 45% in period 3; 30% in period 4
For purchases made in PR-2:
Payments will be 25% in period 3; 45% in period 4; 30% in period 5
For purchases made in PR-3:
Payments will be 25% in period 4; 45% in period 5; 30% in period 6



The original purchase figure which is missing can now be calculated with the following formula:
Purchase = (100% / % of Bal left) × Bal left in £'s
Purchase in PR-1: (100% / 30% Bal left) × £18200 Bal left = £60666.67
Purchase in PR-2: (100% / 75% Bal left) × £60000 Bal left = £80000
Purchase in PR-3: (100% /100% Bal left) × £105500 Bal left = £105500



Now, look back at the purchase payment schedule done above.
So, we can see that in period 4 we will make the following payments:
From Purchase in PR-1 0.30 × 60666.67 = 18,200
From Purchase in PR-2 0.45 × 80000 = £36,000
From Purchase in PR-3 0.25 × 105500 = £26,375
Total Payments in Period 4 = 80,575
And, In period 5 we will make the following payments:
From Purchase in PR-2 0.30 × 80000 = £24000
From Purchase in PR-3 0.45 × 105500 = £47475
Total Payments in Period 5 = £71,475


Additionally, Period 3 T-Accounts will look like as under:



Please do correct me if I am wrong.
Thank you.