Exercise-4 (a):

The Lucky company uses direct method to prepare its statement of cash flows and want your assistance in computing the toal cash paid to suppliers of inventory during the year 2015. The company presents you the following information about its invontory, accounts payable and cost of goods sold for the year 2015:

Inventory on January 1, 2015 $40,000
Inventory on December 31, 2015 $75,000
Accounts payable on January 1, 2015 $22,000
Accounts payable on December 31, 2015 $35,000
Cost of goods sold for the year 2015 $350,000

Required: Calculate total cash paid to suppliers of inventory by Lucky company during the year 2015.

Solution:

Cash paid to suppliers:
Cost of goods sold 350,000
Add: increase in inventory* 35,000

Purchases 385,000
Deduct: increase in accounts payable** 13,000

Cash paid to suppliers during the year 372,000

*Increase in inventory during the period: 75,000 – 40,000 = 35,000
**Increase in accounts payable during the period: 35,000 – 22,000 = 13,000

Exercise-4 (b):

The Metro company’s cost of goods sold for the current year is $145,000. The beginning and ending balances of its merchandise inventory and accounts payable are given below:

Beginning Ending
Merchandise inventory $40,000 $32,000
Accounts payable $29,000 $15,000

Required: Compute the amount of cash paid for the purchase of merchandise inventory during the period.

Solution:

Cash paid to suppliers:
Cost of goods sold 145,000
Deduct: decrease in inventory* 8,000

Purchases 137,000
Add: decrease in accounts payable** 14,000

Cash paid to suppliers during the year 151,000

*Decrease in inventory during the period: $40,000 – $32,000 = $8,000
**Decrease in accounts payable during the period: $29,000 – $15,000 = $14,000

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