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7 March, 14:23

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts payable. Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%. The firm's investment in accounts payable in the current year is $2,218,500. What is the projection for next year's accounts payable? A. $3,781,750 B. $4,184,000 C. $2,127,000 D. $2,884,050

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  1. 7 March, 16:17
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    option (D) $2,884,050

    Explanation:

    Data provided in the question:

    current year's sales = $27,800,000

    Current year's cost of goods sold = $17,528,000

    Sales for the next year = current year's sales + 30% current year's sales

    = $27,800,000 + 0.30 * $27,800,000

    = $36,140,000

    Accounts payable in the current year = $2,218,500

    Now,

    Percentage of Account payable to sales for the current year

    = [Accounts payable in the current year : current year's sales] * 100%

    = [ $2,218,500 : $27,800,000 ] * 100%

    = 7.98%

    This will be same for the next year

    therefore,

    Percentage of Account payable to sales for the next year

    = [Accounts payable in the next year : next year's sales] * 100%

    or

    7.98% = [ Accounts payable in the next year : $36,140,000 ] * 100%

    or

    Accounts payable in the next year = 0.0798 * $36,140,000

    = 2,884,050

    Hence,

    The correct answer is option (D) $2,884,050
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