Select the correct equation format for the purchases budget. Multiple Choice Beginning inventory + expected sales = required purchases. Beginning inventory + expected sales – desired ending inventory = required purchases. Cost of budgeted sales + beginning inventory – desired ending inventory = required purchases. Cost of budgeted sales + desired ending inventory – beginning inventory = required purchases.
The Correct Answer and Explanation is:
The correct equation format for the purchases budget is:
Beginning inventory + expected sales – desired ending inventory = required purchases.
Explanation:
The purchases budget is a financial tool that helps businesses plan for the goods they need to purchase during a specific period. It is used to ensure that there is enough inventory to meet expected sales while also accounting for any changes in inventory levels.
To understand this formula:
- Beginning Inventory: This is the inventory that is available at the start of the period. It’s what the company already has in stock.
- Expected Sales: This refers to the sales forecast for the period, which indicates the amount of goods the company expects to sell.
- Desired Ending Inventory: This is the amount of inventory the company wants to have at the end of the period. It may be determined based on safety stock requirements or other business needs.
By subtracting the desired ending inventory from the sum of beginning inventory and expected sales, you get the required purchases. This is the amount of new inventory that must be purchased to ensure the company can meet both its sales and inventory goals.
Let’s break it down:
- The company begins with inventory (Beginning Inventory).
- It needs enough goods to fulfill its expected sales.
- However, it also wants to maintain a certain amount of inventory at the end of the period (Desired Ending Inventory).
Thus, the required purchases would be the difference between what is needed for expected sales and the inventory already available, adjusted for the desired inventory at the end of the period.
For example:
- Beginning Inventory: 500 units
- Expected Sales: 800 units
- Desired Ending Inventory: 400 units
Required Purchases = 500 (Beginning Inventory) + 800 (Expected Sales) – 400 (Desired Ending Inventory) = 900 units.
This equation ensures that a company will be prepared for both sales and inventory needs at the end of the period.
