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In: Accounting

The projected balance of inventories at the end of the first year of operations is?

A family friend, Mr. Burn Out availed of the early retirement scheme offered by his employer. He said that he was already tired of the same routine of spending eight full hours in an office doing the same thing for the last twenty years.

Mr. Burn Out plans to get into the field of entrepreneurship. He would invest part of his retirement pay in a business that would deal with the sale of medical supplies to local clinics and hospitals.

When Mr. Burn Out learned that you are an accountant, he confessed that he is excited with his planned investment project, but very much afraid because he cannot afford to fail and lose his hard-earned retirement pay. 

You advised that a Feasibility Study be prepared for his planned investment project. The study, you said, would determine the viability of his proposed business undertaking. it would cover key areas, such as marketing, production or purchasing, and finance, among others. You emphasized that the financial aspect is the most critical of them all. 

Mr. Burn Out requested you to prepare a feasibility study for his proposed business. You immediately started and gathered the following relevant data.

 1. Projected sales for the first year of operations are $288,000, spread evenly during the year. All sales will be on account with an average collection period of one month.

2. The cost ratio will be 60% of sales.

3. At the end of the first year, the acid-test ratio will be 1:1, while the current ratio will be 2:1.

4. Once the business is underway, purchases will replace the stock sold each month. The average payment period for accounts payable arising from the purchases of merchandise will be two (2) months.  

5. Mr. Burn Out will open an account with the nearest bank and deposit $260,000 to start the business. 

6. Various fixed assets will be acquired for cash at a total cost of $240,000. These fixed assets will be depreciated at the rate of 10% per year using the straight-line method. 

7. Operating expenses, other than depreciation, are estimated at $70,000 per year. There will be no accruals and prepayment at year-end.

8. Mr. Burn Out will make drawings in excess of the amount necessary to meet the above plans. 

 

Question: The projected balance of inventories at the end of the first year of operations is?

Solutions

Expert Solution

Question: The projected balance of inventories at the end of the first year of operations is?

 

Computation:

STEP 1: Compute for current assets.

  • The only current liability is the accounts payable with a projected balance of $28,800.

 

Current Ratio = 2:1

Current Ratio = Current Assets/Current Liabilities

                 2   =  Current Assets/28,800

Current Assets = 28,800 x 2

Current Assets = $57,600

 

STEP 2: Compute for the quick assets.

Acid-Test Ratio = 1:1

Acid-Test Ratio = Quick Assets/Current liabilities

                    1   = Quick Assets/28,800

Quick Assets = 28,800

 

STEP 3: Compute for the inventories.

Total Current assets $57,600
Less: Quick Assets 28,800
Inventories $28,800

The projected balance of inventories at the end of the first year of operations is $28,800.

Renze Joy Candido answered 3 years ago
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