Question

Quality Products Company has a broad range of products it sells in a four-state area. Sales for the four quarters of 2019 are expected to be $575,000, $412,000, $749,000, and $638,000, for an annual total of $2,374,000.

Cost of goods sold averages 57% of sales. Ending inventory for each quarter should be 10% of cost of goods sold for the following quarter. Inventory at January 1 is expected to be $40,000.

Required:

1. Show calculations for ending inventory, purchases, and cost of goods sold for the first three quarters of 2019.
2. Show calculations for third-quarter purchases assuming that the ending inventory should be 40% of the next quarter’s sales and that January 1 inventory was $130,000.
3. Briefly explain in your own words what additional information the company will need before they can prepare the schedule of cash collections for the same three quarters.

Answer 1

Computation of Cost of Goods Sold and Ending Inventory								Computation of Purchases
Particulars		Q1	Q2	Q3	Q4			Particulars		Q1	Q2	Q3	Q4
Sales		$ 575,000.00	$ 412,000.00	$ 749,000.00	$ 638,000.00			Cost of Goods sold		$ 327,750.00	$ 234,840.00	$ 426,930.00	$ 363,660.00
COGS		$ 327,750.00	$ 234,840.00	$ 426,930.00	$ 363,660.00		Add:	Desired Closing inventory		$    23,484.00	$    42,693.00	$    36,366.00
Ending Inventory		$    23,484.00	$    42,693.00	$    36,366.00				Inventory needed		$ 351,234.00	$ 277,533.00	$ 463,296.00
							Less:	Opening inventory		$    40,000.00	$    23,484.00	$    42,693.00
								Purchases required		$ 311,234.00	$ 254,049.00	$ 420,603.00

	Computation of purchases for the third quarter
	Particulars		Q1	Q2	Q3	Q4
	Cost of Goods sold		$ 327,750.00	$ 234,840.00	$ 426,930.00	$ 363,660.00
Add:	Desired Closing inventory		$ 164,800.00	$ 299,600.00	$ 255,200.00	$                   -
	Inventory needed		$ 492,550.00	$ 534,440.00	$ 682,130.00
Less:	Opening Inventory		$ 130,000.00	$ 164,800.00	$ 299,600.00
	Purchases required		$ 362,550.00	$ 369,640.00	$ 382,530.00

In order to prepare a schedule of cash collections, the company first have to decide how much of the sales will be on cash basis and on credit basis. If company starts selling on credit basis, then company must settle the collection period with the debtors i.e., what percentage of money they'll be paying at what interval of time. Then company must ascertain the amount of money that might become unrecoverable from the debtors. After considering all the above situations, the company will be able to prepare its schedule of cash collection.