Cash Management sample assessment Paper 1

I am struggling to understand the answer for Task 3 question c which asks to identify the value of trade payables at the end of period 3 that will be paid in periods 4 and 5.

Please help!

Comments

  • Jessnav89
    Jessnav89 Registered Posts: 2
    Hi Henson,

    The balances they give you aren't 100%, balance 1 is 35%, 2 is 75% and 3 is 100%.

    Hope that helps.
  • ManiGoldwater
    ManiGoldwater Registered Posts: 11
    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, 40% two months after the date of purchase and 35% 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 =£30,135
    Balance from period 2 =£66,900
    Balance from period 3 =£92,400
    Total payables at the end of period 3 =£189,435
    Identify the value of trade payables at the end of period three that will be paid in period 4 and 5.
    ----------------------------------------------------------------------------------------------------------------------------------------------

    Solution: The question is actually 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: 40%
    three months after: 35%
    So the payments schedule will follow the following pattern (we can do this in a two way table as well):
    For purchases made in PR-1: Payments will be 25% in period 2; 40% in period 3; 35% in period 4
    For purchases made in PR-2: Payments will be 25% in period 3; 40% in period 4; 35% in period 5
    For purchases made in PR-3: Payments will be 25% in period 4; 40% in period 5; 35% in period 6
    Payment Schedule



    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% / 35% Bal left) × £30135 Bal left = £86100
    Purchase in PR-2: (100% / 75% Bal left) × £66900 Bal left = £89200
    Purchase in PR-3: (100% / 100% Bal left) × £92400 Bal left = £92400



    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 0.35 × 86100 = £30,135
    From Purchase in PR-2 0.40 × 89200 = £35,680
    From Purchase in PR-3 0.25 × 92400 = £23,100
    Total Payments in Period 4 = £88,915

    And, In period 5 we will make the following payments:

    From Purchase in PR-2 0.35 × 89200 = £31,220
    From Purchase in PR-3 0.40 × 92400 = £36,960
    Total Payments in Period 5 = £68,180



    Also, Period 3 T-Accounts will appear as shown under:




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