Collen Bakery purchases flour from a mill on a regular basis. The monthly purcha
ID: 2711260 • Letter: C
Question
Collen Bakery purchases flour from a mill on a regular basis. The monthly purchase scheduleing and ending payables is provided below.
a. Calculate the days purchases outstanding for March, April, May, and June using quarterly purchases to calculate the average daily purchases.
b. What is your conclusion regarding the firm's payment behavior?
c. Below is presented a table showing the amount of payables remaining in successive months for purchases made during the January through June period of operations. Convert the table to a balance fraction matrix and discuss the firm's payment pattern as represented by the balance fraction table.
d. What is your conclusion about the firm's payment pattern?
Dec Jan Feb Mar Apr May June Purchases 25 45 80 120 100 90 50 Ending payables 50 60 80 85 70 50Explanation / Answer
Dec Jan Feb Mar Apr May June Purchases 25 45 80 120 100 90 50 Ending payables 50 60 80 85 70 50 Days Purchase outstanding ( as calculated below) 26.57 24.75 24.03 22.50 1a) Days Purchase Outstanding =Number of Days in a Period / Purchases× Average Trade Payables For March Average purchases for March = ( Purchases for January + February + ,March) /3 = (45 + 80+120)/3 = 81.67 Average trade payable for March = ( opening trade payable + closing trade payable) /2 = (60 + 80)/2 = 70 Hence Days Purchase outstanding is = 31/81.67 * 70 = 26.57 For April Average purchases for April = ( Purchases for February + March+ April) /3 = ( 80+120+100)/3 = 100 Average trade payable for April = ( opening trade payable + closing trade payable) /2 = (80+85)/2 = 82.50 Hence Days Purchase outstanding is = 30/100 * 82.50 = 24.75 For May Average purchases for May = ( Purchases for March+ April+ May) /3 = ( 120+100 +90)/3 = 100.33 Average trade payable for May = ( opening trade payable + closing trade payable) /2 = (85+70)/2 = 77.50 Hence Days Purchase outstanding is = 31/100 * 77.50 = 24.03 For June Average purchases for June = ( Purchases for April+ May + June) /3 = ( 100 +90 + 50)/3 = 80 Average trade payable for June = ( opening trade payable + closing trade payable) /2 = (70+50)/2 = 60 Hence Days Purchase outstanding is = 30/80* 60 = 22.50 1 b) The firms payment pattern is improving every month , as the days purchase outstanding is reducing Lower the days purchase outstanding , better is the payment pattern 1c) Account Payables Balances Purchases Jan Feb Mar Apr May June Jan 45 20 22 Feb 80 38 20 Mar 120 60 30 Apr 100 55 17 May 90 53 15 June 50 35 NA 60 80 85 70 50 Balance Fraction table Purchases Jan Feb Mar Apr May June Jan 45 44.44% 48.89% Feb 80 47.50% 25.00% Mar 120 50.00% 25.00% Apr 100 55.00% 17.00% May 90 58.89% 16.67% June 50 70.00% January balance fraction table for accounts payable = January accounts payable balance/ January Purchases '= 20/45 =44.44% and so on 1d) As per the above table it can be seen that approx 50% is paid in the month of purchase and 20 - 25% in the following month and the balance 25 - 30 % is paid in the subsequent month which means for February purchase - 47.50% is paid inFebruary , 25% in March and balance 27.5% in April as accounts payable balance is nil in April for February purchase