Question

Calculate opening and closing Trade Payables from the following information :
Total purchases ₹ 15,00,000;
Cash purchases are 25% of credit purchases;
Trade payables turnover ratio is 4 times;
Closing trade payables are two times of opening trade payables.

Hint:

When calculating ROI, remember to use Profit before interest and tax as numerator, and total capital employed as denominator.

Answer 1

Step 1: Calculate Credit Purchases
Let credit purchases be represented by x. Cash purchases are 25% of x, which is 0.25x. Total purchases equal x + 0.25x = 1.25x. Given that total purchases amount to 15,00,000, we have: \[ 1.25x = 15,00,000 \] Solving for x: \[ x = \frac{15,00,000}{1.25} = ₹ 12,00,000 \] Therefore, credit purchases are ₹ 12,00,000. Step 2: Average Trade Payables
The formula for Trade Payables Turnover Ratio is: Trade Payables Turnover Ratio = \(\frac{\text{Net Credit Purchases}}{\text{Average Trade Payables}}\) Substituting the known values: \[ 4 = \frac{12,00,000}{\text{Average Trade Payables}} \] Calculating the Average Trade Payables: \[ \text{Average Trade Payables} = ₹ 3,00,000 \] Step 3: Opening and Closing Payables
Let the opening payables be represented by y. The closing payables are twice the opening payables, so they are 2y. The average of opening and closing payables is calculated as: Average = \(\frac{y + 2y}{2} = 1.5y\) We know the average trade payables are ₹ 3,00,000: \[ 1.5y = 3,00,000 \] Solving for y: \[ y = ₹ 2,00,000 \] Thus, the opening payables are ₹ 2,00,000, and the closing payables are ₹ 4,00,000.