CFA Practice Question
Jumbo, Inc. had sales of $8,000 in November, $14,000 in December, and projects sales of $10,000 in January, $12,000 in February, and $8,000 in March. The firm's COGS in any given month is equal to 70% of the next month's sales. The firm collects its receivables in 60 days and pays its payables in 30 days. The firm begins January 1 with $10,000 in cash. All sales and purchases are on credit. There are no other costs or revenues. What is Jumbo's accounts payable at the end of January? Assume there are 30 days in every month.
A. $5,600
B. $9,200
C. $8,400
Explanation: Since the payables period is 30 days, the A/P balance will equal January purchases. How much was purchased in January?
User Contributed Comments 4
| User | Comment |
|---|---|
| FinanceAnalyst | A/P = 12000*70%=8400 |
| sheenalim | But why COGS equal to purchases? unless what you purchased in each month gets all sold out in the same month. |
| nostalgia | considering that COGS = Beginning inventory + Purchases - Ending inventory, I do find it strange that COGS has been taken to equal purchases. |
| chris297 | By literal definition of accounts payable, it means the amounts owned to suppliers for goods/ services purchased on credit. I think we need to assume that 'the 70% sales" of next month is more than just a number, it also means that we are using this number as money repaying the supplier. This is due to the fact that we can only make profit 60 days counting from January 1. This explanation could be a bit far-fetched but I could not think of other ways. |