Page 73 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 3. Find out the value of creditors from the following:

Sales `1,00,000 Opening stock `10,000
Gross profit on Sales 10% Closing stock `20,000

Creditors velocity 73 days Bills payable `16,000
Note: All purchases are credit purchases.
Solution:
To find out the volume of purchases, the formula of cost of goods sold should be taken into

consideration.
Cost of goods sold = Opening stock + Purchases - Closing stock
X = `10,000 + Y - `20,000

Cost of goods sold = Sales - Gross profi t
= `1,00,000-10% on `1,00,000
= `90,000
The next step is to apply the found value in the early equation.

Purchases = ` 90,000 - `10,000 + `20,000
= ` 1,00,000

To find out the value of creditors, the creditor velocity and creditors turnover ratio-
Creditors velocity = 365 days
Creditors turnover ratio
Credit purchases

Creditors turnover ratio =
Bills payable + Sundry creditors

The next step is to find out the sundry creditors; the reversal process is to be adopted.

365 days
73 days =
Creditors turnover ratio

365 days
Creditors turnover ratio = = 5 times
73 days
The next step is to substitute the found value in the equation of creditors turnover ratio.
,
,
`16,000 + Sundry creditors = `1 00 000
5
Sundry creditors = `20,000 - `16,000 = `4,000

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