In exercise-4 we used formula approach to compute net cash paid to suppliers of merchandise. A more conceptual approach is however to use t-accounts for this purpose. In this exercise, we shall use the data similar to exercise-4 and find out the net cash paid to suppliers using t-accounts approach.

Exercise-5 (a):

Consider the following information of a merchandising company 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 during 2015 using t-accounts approach.

Solution:

t-accounts-approach

*These are balancing figures:

(350,000 + 75,000) – 40,000 = 385,000
(22,000 + 385,000) – 35,000 = 372,000

The cash paid to suppliers during the period is $372,000.

Exercise-5 (b):

A company provides the following data for the current period

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

The cost of goods sold (COGS) for the current period is $145,000.

Required: Compute the amount of cash paid for the purchase of merchandise inventory during the period by preparing t-accounts.

Solution:

t-accounts-approach2

*These are balancing figures:

(145,000 + 32,000) – 40,000 = 137,000
(29,000 + 137,000) – 15,000 = 151,000

The company paid $151,000 to its suppliers during the period.

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