Ahmed Company purchases all merchandise on credit. It recently budgeted the month-end accounts payable balances and merchandise inventory balances below. Cash payments on accounts payable during each month are expected to be May, $1,400,000; June, $1,550,000; July, $1,400,000; and August, $1,500,000 Accounts Payable Merchandise Inventory

31-May 150,000 260,000
30-Jun 130,000 500,000
31-Jul 300,000 300,000
31-Aug 120,000 330,000

Required:
a. Compute the budgeted amounts of merchandise purchases.
b. Compute the budgeted amounts of cost of goods sold.

Ahmed Company

a. Computation of the budgeted merchandise purchases:

                                    May              June             July            August

Cash payments    $1,400,000    1,550,000    1,400,000     1,500,000

Ending balance         150,000        130,000      300,000        120,000

Total                    $1,550,000   $1,680,000  $1,700,000   $1,620,000

less:

Beginning balance                        150,000       130,000        300,000

Purchases          $1,550,000   $1,530,000  $1,570,000   $1,320,000

b. Computation of the budgeted cost of goods sold:

                                             May            June            July            August

Beginning Inventory                              260,000     500,000      300,000

Purchases                        1,550,000   1,530,000   1,570,000    1,320,000                        

Goods available for sale 1,550,000    1,790,000 2,070,000    1,620,000

Ending Inventory               260,000     500,000     300,000      330,000

Cost of goods sold       $1,290,000 $1,290,000 $1,770,000 $1,290,000

Explanation:

a) Data and Calculations:

         Accounts Payable    Merchandise Inventory

31-May    150,000              260,000

30-Jun    130,000              500,000

31-Jul     300,000              300,000

31-Aug   120,000               330,000

b) Ahmed Company's purchases of merchandise can be obtained by reviewing the Accounts Payable beginning and ending balances and the cash payments made during the months.  Alternatively, monthly Accounts Payable can be prepared and the differences in the debit and credit side will be the purchases as the missing figure.

c) Once the purchases of merchandise have been computed, to compute the cost of goods sold becomes easier.  The cost of goods sold for Ahmed Company is the difference between the cost of goods available for sale and the ending inventories of merchandise.

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