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A venture pays 60% of its purchases in the current month purchases and the remainder 40% in the...

Question:

A venture pays 60% of its purchases in the current month purchases and the remainder 40% in the following month. If the purchases for the month of August are $20M and for the month of September are $30M, find the disbursement for purchases for the month of September

A. $21M

B. $26M

C. $12M

D. $16M

E. $9M

Cash Flow Management:

Cash flow management is the process of monitoring cash receipts and cash payments and ensuring the business is able to pay its financial obligation as they become due. Taking full use of credit terms extended to the business is one of the techniques of managing cash flow.

Cash flow determines the financial health of a business and if a business is unable to manage its cash flow it may experience problems paying expenses and debt obligations which are due. When a business is struggling to pay its obligations, it is usually headed toward bankruptcy because suppliers stop extending goods on credit to the business and this worsens the business cash problem.

Answer and Explanation:

We determine disbursement as follows.

Step1,

we calculate the amount due from august

  • Amount due from august = 40 % * 20,000,000
  • Amount due from august = $ 8,000,000

Step 2,

We calculate the amount disbursed for September purchase

  • Amount disbursed in September = 60 % * 30,000,000
  • Amount disbursed in September = $18,000,000

Step 3

We calculate the total disbursement in the month of September.

  • Total disbursement = August disbursement + September disbursement
  • Total disbursement = $8,000,000 + $18,000,000
  • Total disbursement = $26,000,000

We pick B as the correct answer


Learn more about this topic:

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What Is Cash Flow? - Definition, Calculation & Example

from Corporate Finance: Help & Review

Chapter 8 / Lesson 14
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